Come on, guys. Inspired regulatory arbitrage calls for a little more creativity than this.

Among the tactics under consideration, banks including the U.K.’s Barclays PLC, Germany’s Deutsche Bank AG and Switzerland’s UBS AG could shore up their U.S. subsidiaries by buying debt from them, according to people familiar with the banks’ strategies….

Such moves “shouldn’t be perceived as creating capital,” said Cornelius K. Hurley, director of the Boston University Center for Finance, Law & Policy. “I doubt the Fed will fall for this…approach, let alone the foreign banks’ home-country supervisors….”

As currently envisioned, the U.S. units would issue to their parents a type of bond that converts into equity if the U.S. business’s capital falls below a certain level. Some European regulators have allowed this type of convertible bond to count as capital, although it is regarded as less helpful for absorbing losses than simple equity.

The European parent companies would finance the purchases of their subsidiaries’ debt by issuing bonds to investors, these people say.

While the strategy isn’t finalized, it is sufficiently advanced that some bank executives have given it the moniker of “internal convertibles.”

European Banks Parry U.S. Rules [WSJ]

Comments (1)

  1. Posted by UFO | February 11, 2014 at 6:20 PM

    Internal convertible. So, if I lend myself money can I write off the interest payments? Also, if I fail to repay me, can I write down a loss? While we're on the topic, can I sell swaps or set up a repo deal on my projected income stream to myself? Inquiring minds want to know

    - Surrealist accountants Co., Inc.