<p>Banks are required under Basel III to maintain sufficient capital buffer in case recession, like the Great Recession of 2008, hits.</p>
<p>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.</p>
<p>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).</p>
<p>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 <a href="https://www.bis.org/bcbs/publ/d417.pdf" rel="nofollow noreferrer">Basel III definition</a> of capital for more details.</p>

CC BY-SA 4.0
2022-03-29T14:53:29.317Z
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.
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T15:02:26.307Z
How does it work? Who buys perceptual bonds from whom?
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T15:07:03.297Z
@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
1muflon1
CC BY-SA 4.0
2022-03-29T15:31:39.590Z
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.
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T15:37:13.233Z
@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
1muflon1
CC BY-SA 4.0
2022-03-29T15:45:27.560Z
Accepted, and I don't want to insist on the term "gift". It was just a clumsy rephrasement, and I will drop it immediately.
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T15:46:14.923Z
My example did focus on the aspect "proving sincerity". It should show how sincerity and "worthyness" could be proved.
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T15:55:50.757Z
@Hans-PeterStricker I still don’t understand how it proves sincerity. The grand kid could still blow the principal on drinks in a bar and just then pay 1 dollar for the rest of her/his life. The point of perpetuities is that they do not burden debtor as much as regular debt but as a consequence the perpetual bonds either have to offer higher coupon rate (interest rate) or they will sell at a discount compared to regular bonds. Debt could be used to provide the grand kid with more discipline compared to gift but I don’t see any extra advantage perpetuity would have over regular debt but if
1muflon1
CC BY-SA 4.0
2022-03-29T15:56:57.090Z
Someone has no sincere interest to invest that money then regardless of whether they get debt or gift they can spend the money however they like, with the debt option they will just have to figure a way how to pay the interest or default on those interest payments
1muflon1
CC BY-SA 4.0
2022-03-30T13:45:07.733Z
Please have a look at my [answer to the other question](https://economics.stackexchange.com/a/50928/22991) where I mention gifts again.
Hans-Peter Stricker
CC BY-SA 4.0
2022-03-29T13:11:13.847Z
2022-03-29T13:19:28.317Z
2022-03-29T13:19:28.317Z
1muflon1
<p>This is a follow-up question to <a href="https://economics.stackexchange.com/questions/50911/loans-that-dont-have-to-be-paid-back-only-the-interest">Loans that don't have to be paid back (only the interest)</a>. In the Wikipedia article on <a href="https://en.wikipedia.org/wiki/Perpetual_bond" rel="nofollow noreferrer">perpetual bond</a>s one reads</p>
<blockquote>
<p>&quot;Most perpetual bonds issued in the present day are deeply
subordinated bonds issued by banks. The bonds [...] help the banks
fulfill their capital requirements.&quot;</p>
</blockquote>
<p>Can you explain in a few words what this means? How do perpetual bonds help the banks fulfill their capital requirements? Which requirements?</p>

<bonds><credit><subsidies>
How do perpetual bonds help the banks fulfill their capital requirements?
Hans-Peter Stricker
# How do perpetual bonds help the banks fulfill their capital requirements?

(Asked by: username_0 on 2022-03-29)

This is a follow-up question to [Loans that don't have to be paid back (only the interest)](https://economics.stackexchange.com/questions/50911/loans-that-dont-have-to-be-paid-back-only-the-interest). In the Wikipedia article on [perpetual bond](https://en.wikipedia.org/wiki/Perpetual_bond)s 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?

**Tags:** bonds, credit, subsidies


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## 1 answers

### Answer by username_1 on 2022-03-29. Score: 1

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](https://www.bis.org/bcbs/publ/d417.pdf) of capital for more details.

> **Comments:**
> **username_0**: 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.  
> **username_0**: How does it work? Who buys perceptual bonds from whom?  
> **username_1**: @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  
> **username_0**: 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.  
> **username_1**: @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  
> **username_0**: Accepted, and I don't want to insist on the term "gift". It was just a clumsy rephrasement, and I will drop it immediately.  
> **username_0**: My example did focus on the aspect "proving sincerity". It should show how sincerity and "worthyness" could be proved.  
> **username_1**: @Hans-PeterStricker I still don’t understand how it proves sincerity. The grand kid could still blow the principal on drinks in a bar and just then pay 1 dollar for the rest of her/his life. The point of perpetuities is that they do not burden debtor as much as regular debt but as a consequence the perpetual bonds either have to offer higher coupon rate (interest rate) or they will sell at a discount compared to regular bonds. Debt could be used to provide the grand kid with more discipline compared to gift but I don’t see any extra advantage perpetuity would have over regular debt but if  
> **username_1**: Someone has no sincere interest to invest that money then regardless of whether they get debt or gift they can spend the money however they like, with the debt option they will just have to figure a way how to pay the interest or default on those interest payments  
> **username_0**: Please have a look at my [answer to the other question](https://economics.stackexchange.com/a/50928/22991) where I mention gifts again.  

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