Analysts forecast that European banks will issue more bail-in bonds over the remainder of 2018, according to the findings of an EU-wide survey.

Sixty-five percent of analysts that responded to the European Banking Authority’s (EBA) semi-annual risk questionnaire said they expect dealers to issue debt eligible to meet the EU’s minimum requirements for eligible liabilities (MREL) and the Financial Stability Board’s (FSB) total loss-absorbing capacity (TLAC) over the next six months. That is up from 60% in December. 

Of bank respondents to the survey, 65% said they expect to issue more MREL-eligible instruments, up from 55% at the end of 2017.

Ongoing uncertainty as to the amount of MREL-eligible debt banks will ultimately be required to hold is fading as a constraint on issuance, with 55% of banks saying this is a barrier compared with 65% in December. But concerns over whether the debt instruments banks issue will meet MREL requirements have increased to 60% from 55% over the same period. Fears that MREL debt is too pricey to issue have also leapt, rising to 30% from 20% in the six months to June.  

The EU’s Single Resolution Board, in partnership with national authorities, has the final say on banks’ MREL levels, based on its assessment of each firm’s loss-absorbing capacity. The dates on which these requirements become effective vary from bank to bank as well. Only a handful of firms have confirmed they have been given an MREL target, with the SRB expected to finish by the end of the year.   

What constitutes MREL-eligible debt is included in the EU’s revised Bank Recovery and Resolution Directive (BRRD II), agreed upon by the European Council on May 25 and now being negotiated with the European parliament. As MREL instruments are bail-inable if a bank collapses, investors demand high returns relative to senior debt exempt from the requirements.

What is it?

The EU’s BRRD dictates the amount of bail-in debt banks must hold. The rules are designed to shift the burden of bailing out a collapsing firm to bondholders, rather than taxpayers. Bail-in debt targets for global systemically important banks have also been established by the FSB, with full compliance expected by 2022.

The EU’s SRB, together with national resolution authorities, began assessing banks’ loss-absorbing capacities in 2016. The following year, it started developing binding requirements for major banking groups, and this year began setting specific targets. 

The June 2018 EBA risk questionnaire was carried out between April and May. Thirty-eight banks and 21 market analysts submitted answers. 

Why it matters 

Banks are keen to load up on MREL- and TLAC-compliant debt ahead of fast approaching deadlines. As Risk Quantum has previously reported, some firms that have already been assigned their MREL targets have scant time in which to comply, with effective dates ranging from this year to 2021.

Anything that curbs their ability to issue today could cause problems for banks later, as any sudden rush to market by a group of dealers could make it harder for each to fulfil their target allocations. One factor that could lead to a bottleneck are new product governance rules introduced in January. Under the rules, banks have to show retail customers that buying possibly risky bonds is nonetheless an appropriate purchase for amateur investors – which may prove too hard an ask. 

Get in touch

Is your bank in the midst of an MREL/TLAC issuance programme? Let us know how it’s going by emailing louie.woodall@infopro-digital.com or tweeting @LouieWoodall or @RiskQuantum. 

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