BoE tells insurers to swap debt

The Bank of England wants insurers to swap their subordinate bank debt holdings for equity or senior debt to shore up the financial system, the FT reports.

Insurers are among the biggest investors in subordinate debt. In the event of insolvency, investors are treated like shareholders.

Paul Tucker, deputy governor for financial stability, told the Association of British Insurers (ABI) conference said: “It won't do for banks to be able to leverage up on subordinated debt (or other forms of hybrid capital) if, just when it matters, the holders do not suffer because the authorities cannot let the banks concerned be liquidated without bringing system collapse down on us all.”

It would be a "helpful step" for the "investment industry to seek out opportunities to convert subordinated debt into equity or, at a discount, into senior unsecured debt."

He added: "It would probably entail a haircut, but I wouldn't air it unless I thought it could be in your collective and medium term interests as investors in our economy and the system of credit that supports and regulates it."

ABI warning

The FT also said that the ABI will next week warn the Financial Services Authority that its dismissal of the "tier two" bank debt will hit insurers' investments.

"We've ended up being large investors, not because we identified banks as a good credit risk but because we needed this type of instrument and they were providing it," said Peter Montagnon, ABI investment director.

"If this market is going to be left to wither, we need a very careful transition period so as not to disrupt the ability of insurers and others to match their long-term liabilities which are, after all, promises to customers."