In November 1999 Halifax Group plc issued two tranches of Tier1 preferred securities. The first tranche of 415 million euroscarried a fixed rate coupon of 7.627% until the first call datein 2011. The second tranche, denominated in sterling (£245million), carried a fixed rate coupon of 7.881% until the firstcall date in 2031.

These were the first Tier 1 securities issued by a UKfinancial institution in a tax deductible form followingFinancial Services Authority (FSA) and Inland Revenue approval.The approval followed guidelines issued by the Basel Committee onBanking Supervision (Basel Committee) which permitted banks toissue this kind of security for up to 15% of their core Tier 1capital (Basel Committee on Banking Supervision pressrelease, "Instruments Eligible for Inclusion in Tier 1 Capital",27th October, 1998; PLC,1998, IX(11), 54).

The capital adequacy framework is intended to ensure that abank has sufficient capital to provide a stable resource toabsorb any losses arising from the risks in its business. Thebasic framework is outlined in the 1988 Basel Accord (the Accord)which is adopted by the FSA (although there are proposals forchange currently been considered (PLC, 1999, X(6), 53)).

Under the Accord there is an agreed definition of whatcharacteristics an instrument must have to qualify as capital.Capital is divided into Tiers according to the characteristics orqualities of each qualifying instrument. Tier 1 capital ratioforms a bank's core capital. It takes two forms: issued capitaland internally generated capital.

Instruments eligible for inclusion in Tier 1.The Basel Committee has reaffirmed that common shareholders'funds (for example, common stock and disclosed reserves orretained earnings) are the key elements of capital and should bethe predominant form of a bank's Tier 1 capital. This element ofcapital best allows banks to conserve resources because itprovides them with full discretion as to the amount and timing ofdistributions. The statement acknowledges the use of innovativecapital instruments such as Halifax's preferred security issuesdesigned to achieve cost effective Tier 1 capital withoutdiluting common equity.

Halifax Group plc (Holdings) established Halifax Group Finance(Jersey) LP (LP), a limited partnership in Jersey which issuedthe Tier I preferred securities to investors.

LP used all of the securities proceeds to fund theinter-company debt security issued by Holdings to LP. Holdings'interest payments to LP on the inter-company debt security fundedthe distributions on the Tier I preferred securities toinvestors.

If the bank breaches its Tier 1 requirements, investors canexchange the preferred securities for preference shares inHoldings.

There are two advantages for the issuer:

According to Tom Scott, tax partner, Linklaters &Alliance, the Halifax issue is ground breaking because it finallylevels the playing field between UK banks and their Europeancompetitors. A UK bank can now raise up to 15% of its corecapital in a tax deductible form without diluting ordinaryequity.

Since this issue two other UK banks, Abbey National and LloydsTSB have followed suit and issued Tier 1 preferredsecurities.