Concepts of economics: What are preferred and why do banks exchange them?

One of the news today was that Bankinter will exchange preferred shares of its clients for a total of 168.16 million euros, for which it has agreed a capital increase of 117.7 million, as reported today to the Commission National Stock Market .

The offer contemplates the exchange of 70% of the purchase amount of the preferred shares for new Bankinter shares, while the remaining 30% will be paid in cash two years after the date of admission to trading of the new shares.

The second question is very simple to answer, the reason is because according to Basel III, preferred shares will no longer count in Tier 1, that is, they will no longer serve the bank to reinforce its capital, since Tier 1 is a ratio that measures the strength of an entity through its basic capital. The Basel III regulations will go into effect on January 1, 2013, that's why there is such a rush.

But… ..What are preferred shares? and Why do banks exchange them?

As for what are preferred shares, they are a financial product that is characterized by:

  • Has part of fixed income and shares
  • It is perpetual, that is, they do not have an expiration date so if you want to get your money back you have to put it up for sale and wait for a buyer to appear. But the purchase price will be the one set by the secondary market , which may be lower or much lower than the initial capital you contributed.
  • It is a product that is not guaranteed by the Deposit Guarantee Fund (FGD), if the bank fails, you lose your money