What are subordinated bonds and hybrid securities?

1. Subordinated bond refers to a form of debt whose repayment order is superior to the company's equity but lower than the company's general debt. The "sub-prime" in the sub-prime debt is completely different from the "sub-prime loan" in the five-level classification of bank loans (normal, concerned, sub-prime, doubtful and loss).

The "subordinated" in subordinated bonds only refers to the "subordinated" of its creditor's rights, which does not mean that its credit rating must be "subordinated"; The "subprime" in the five-level classification is classified as non-performing loans together with "doubtful" and "loss".

2. Hybrid securities belong to hybrid securities, which are bond forms designed according to the requirements of Basel Accord for hybrid capital instruments, and the raised funds can be included in the secondary capital of banks. Commercial banks can issue a certain amount of mixed securities to fill the gap of 100% of existing secondary capital.

According to the quality of capital and the ability to make up for losses, the Basel Accord divides the capital of commercial banks into tier-one capital and tier-two capital, among which tier-two capital can be divided into lower tier-two capital and higher tier-two capital. Hybrid securities (hybrid capital instrument) is a senior secondary capital belonging to secondary capital.

Extended data:

The main difference between subordinated bonds and hybrid capital instruments is that hybrid capital instruments can and must be used to share the losses of banks without stopping trading, while subordinated bonds can only be used to pay off the losses of banks when they go bankrupt and liquidate.

Therefore, in a sense, hybrid capital instruments have the property of acting as capital more than subordinated bonds. The most common hybrid capital instrument is convertible bonds. For domestic banks, issuing convertible bonds can fundamentally solve the problem of insufficient capital than issuing subordinated debts.

Subordinated bonds only have the property of capital within a certain period of time, rather than the bank's own capital, and will eventually be repaid. Therefore, subordinated bonds can not fundamentally solve the problem of insufficient capital adequacy ratio of banks, but only provide banks with a buffer period to improve their operating conditions and adjust their asset structure.

References:

Baidu encyclopedia-subordinated bonds

References:

Baidu Encyclopedia-Hybrid Securities