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According to the latest Bank of England quarterly bulletin, sovereign wealth funds appear to have stopped pouring in cash into under-capitalized north american and european banks. During the second quarter of this year, banks needed around $100 billion of additional tier one capital. However, the cash rich sovereigns provided virtually nothing.
This particular method of recapitalization reached a peak towards the end of last year, when Citibank and others asked rich investors in Asia and the Middle East to bail them out. More recently, the sovereign investors have contributed less. Instead, banks have been forced to rely on their own shareholders for funding through rights issues.
Banks have also relied on hybrid capital securities to supplement tier one capital. These securities are essentially debt instruments that have some features like equity, such as coupon suspensions and principal write downs.
Why have the sovereign wealth funds disappeared? Perhaps, these funds have begun to appreciate the extent of banking sector difficulties in North America and Europe.
Of course, shareholders also have a limited interest in bailing out failing banks. So what happens when banks can no longer rely on the private sector to replenish capital levels? Watch out, the banks will be looking to the public sector for a bailout.