Understanding the capital structure of banks can help investors mitigate risk, according to Tyndall Asset Management (Tyndall AM).
Tyndall has warned investors that banks issue various securities with different levels of obligation to pay, which provides investors with varying levels of protection.
"Knowing how an investment sits within the capital structure of a bank's debt can help an investor manage exposure to risk," Tyndall AM head of credit John Sorrell said.
"Investors should understand the different levels of debt, particularly when investing in hybrid bank products."
Mr Sorrell explained that the highest protection levels were from secured senior securities, which have claims on the bank's assets, and senior debt and deposits, which are protected against losses by the levels below them.
"Lower level securities are tier-one debt which is expected to absorb first losses if the bank experiences any fundamental problems and tier-two debt which will absorb losses if tier one is not sufficient," he said.
"Within each class, some securities may have seniority over others," Mr Sorrell said.
"Moreover, for international investors, jurisdictional differences mean that the treatment of the different classes may vary, both from regulatory and repayment aspects."
According to Mr Sorrell, within the Australian direct retail market it is difficult to access the banks' senior debt market securities.
