In 2002 and 2003, the spread differential between Tier 1 preferred and Upper Tier 2 has exceeded the spread differential between Upper Tier 2 and Lower Tier 2 in the Euro market for most of the time, as we can see. This observation does not correspond with S&P’s methodology for rating bank capital. Investors seem to disagree with the rating agency that the step from dated to perpetuity justifies a larger increase of the risk premium than the step from cumulative to noncumulative. It also highlights that the spread differentials between Upper Tier 2 versus Lower Tier 2 and Tier 1 versus Upper Tier 2 do not necessarily move in tandem. However, these observations should be interpreted with caution, because the indices that we have used to construct the time series are based on differing issuer universes.
