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This is a follow-up question to Loans that don't have to be paid back (only the interest). In the Wikipedia article on perpetual bonds one reads

"Most perpetual bonds issued in the present day are deeply subordinated bonds issued by banks. The bonds [...] help the banks fulfill their capital requirements."

Can you explain in a few words what this means? How do perpetual bonds help the banks fulfill their capital requirements? Which requirements?

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Banks are required under Basel III to maintain sufficient capital buffer in case recession, like the Great Recession of 2008, hits.

These capital buffers depend on how risky the assets (mostly loans that bank issues) and bank liabilities (bank’s own external financing) are and how much equity bank has.

I won’t go into deep detail because Basel III is incredibly complicated, but since perpetual bonds never have to be repaid they function similar to shares (shares can also be considered perpetuities if they always pay dividends).

As a result even though technically perpetual bond is bank liability under Basel III tier I and II capital, bonds with equity features (eg perpetual bonds) count toward capital buffer (the word capital buffer as defined by Basel III is really bit misleading since it does not include just bank owned capital). See Basel III definition of capital for more details.

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  • $\begingroup$ So it has nothing to do with proving sincerity (as I initially assumed), being worth the gift? How could it: Sincerity is not a value on the capital market. $\endgroup$ Mar 29, 2022 at 14:53
  • $\begingroup$ How does it work? Who buys perceptual bonds from whom? $\endgroup$ Mar 29, 2022 at 15:02
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    $\begingroup$ @Hans-PeterStricker 1. I honestly dont understand how perpetuities could somehow prove sincerity of people/institutions 2. just because you do not repay principal that does not make perpetuity a gift. Perpetuities are not gifts using econ terminology, nor using common dictionary definition of gift. 3. The bonds are sold by bank and bought by: private individuals, companies, non-profit organization if they have investment funds or governments. Later they can be also resold on secondary markets $\endgroup$
    – 1muflon1
    Mar 29, 2022 at 15:07
  • $\begingroup$ Consider a grandmother A which gives her grandchild B 100\$ for retail investment, not repayable but demanding 1% interest per year. If B were lazy he would put it under the mattress, but has to pay 1\$ per year. Only when he invests it with 2% interest he can make a gain of 1\$ per year. Roughly speaking. $\endgroup$ Mar 29, 2022 at 15:31
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    $\begingroup$ @Hans-PeterStricker it’s still not gift, even though the terms would be generous. A dictionary defines gift as “a thing given willingly to someone without payment” which is also close to Econ definition. In your example, the child still has to pay interest so it’s not a gift. You could always craft your own terminology if you are working on some research or article, but then other scholars or people interested in economics won’t understand what you are talking about so unless there is any substantial reason why you need to redefine the word gift its best to stick to their proper definitions $\endgroup$
    – 1muflon1
    Mar 29, 2022 at 15:37

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