Structural Hysteresis and Priority Reversal in Hybrid Capital Instruments: A Forensic Analysis of Irreversible Trigger Events

This work examines the structural fragility of Hybrid Capital Instruments under contemporary regulatory regimes, including Basel III and IFRS 9. While such instruments exhibit debt-like characteristics and defined seniority under normal market conditions, this study identifies an endogenous priority reversal mechanism embedded within contractual and regulatory structures that activates under specific liquidity or capital adequacy stress thresholds. A Binary Forensic Audit Model is proposed to distinguish between nominal priority and effective priority, demonstrating that once certain covariance events are triggered, the resulting seniority reconfiguration exhibits thermodynamic irreversibility. Post-event valuation recovery is therefore structurally infeasible, regardless of subsequent capital injections or market stabilization. The analysis shows that traditional yield-based due diligence and credit rating frameworks systematically fail to capture this class of structural risk. Instead, ex-ante evaluation must focus on seniority rigidity and phase-transition behavior under stress scenarios. The findings reframe hybrid capital assessment as a topology problem rather than a pricing problem, with direct implications for governance, risk management, and pre-decision structural audits.