Bail-in and the Net Stable Funding Ratio

Below is a link to a good article written by Risk Magazine (subscription required) on the tension between the proposal that banks issue bail-in debt and the requirement that those same banks comply with the Net Stable Funding Ratio (NSFR).

The NSFR is a liquidity ratio which is to be introduced in 2018 as part of the Basel III reforms.  It is designed to address the problems that can arise due to liquidity mismatches, such as those which affected Northern Rock.  Broadly speaking, its purpose is to align more closely longer-term, less-liquid assets with longer-term liabilities.

In summary, the article claims that the effect of the bail-in proposals would mean that “banks would have to sell more bonds at a higher cost to a smaller group of buyers”.  It points to a body of research which estimates that banks will have to issue EUR 2.7 trillion in long-term debt in order to comply with the NSFR.  However, it also notes other research which suggests that:

  • a significant proportion of investors do not regard bail-in senior debt as an investable asset class;
  • investors who may continue to take bail-in risk may demand as much as a 345 basis point premium on spreads in order to do so;
  • concerns persist as to whether conversion/write-down clauses in bail-in debt would mean that these events would no longer qualify as “Credit Events” for the purposes of CDS transactions; and
  • The effect of the risk-based capital guidelines for insurers which form part of the Solvency II reforms to take effect in 2014, will be to encourage insurance companies to invest in shorter-dated securities, rather than the longer-dated securities which Basel III will encourage banks to issue.

The article can be found here:

http://www.risk.net/risk-magazine/feature/2163424/regulatory-catch-22-bail-plans-collide-basels-nsfr

 

EU COMMISSION UPDATE ON LIKELY TIMING OF RRP DIRECTIVE

On 3 April 2012, the EU Commission published an update to its legislative proposals programme for 2012.  The legislative initiative on a framework for bank recovery and resolution now looks set to be adopted in June 2012.

The document can be found here:

 http://ec.europa.eu/atwork/programmes/docs/forward_programming_2012.pdf

EU MINISTERS MEET TO DISCUSS BANK RESOLUTION

EU finance ministers and central bank governors met in Copenhagen on Friday and Saturday to discuss strategy for solving the economic crisis, the resolution of failing banks and the EU budget.  On the second day of the meeting a common framework for the resolution of failing banks was discussed with Margrethe Vestager, the Danish Minister for Economic Affairs and the Interior, noting that:

“The crisis has shown us how important it is that countries have an efficient and credible system which can step in when banks are failing. Some EU countries have already introduced resolution regimes, but it is important that we agree on a common EU framework in order to ensure a level playing field, create the right conditions for cross-border banking and ensure responsibility in the financial sector. At the same time, we must carefully consider the timing for such a framework, since financial markets are fragile.”

A report on the meeting can be found here: http://eu2012.dk/en/NewsList/Marts/Uge-13/informal-ecofin

STATEMENT BY MICHEL BARNIER ON THE EUROPEAN BANK RECOVERY AND RESOLUTION FRAMEWORK PROPOSAL

On 30 March 2012, the EU Commission published a statement by Michel Barnier, European Commissioner for Internal Market and Services, on the proposed European framework for bank recovery and resolution.

The Commission is in discussions with key stakeholders to finalise the proposal.  The discussions will focus on the use of the bail-in tool, with specific issues under discussion including:

  • Conditions when a debt write-down could be triggered,
  • Scope and purpose of the tool,
  • Hierarchy of creditor claims in a debt write-down,
  • Details and rationale behind a required minimum level of liabilities eligible for write-down,
  • Legal and practical details of the implementation of a debt write-down,
  • Timing and entry into force of the tool.

 It was noted that the Commission intends to publish its proposal before the next meeting of the G20, which is scheduled to take place in Mexico from 18-19 June 2012.

 The statement is available here:

 http://ec.europa.eu/commission_2010-2014/barnier/docs/speeches/20120330/statement_en.pdf

UPDATE ON EU COMMISSION PROPOSAL FOR BANK RECOVERY AND RESOLUTION

The EU Commission has updated the Crisis Management section of it website to note the fact that it is currently undertaking final technical discussions with key stakeholders prior to the publication of its proposal for a European framework for bank recovery and resolution.

The Commission states that the discussions will take place over the next four weeks and are designed to lead to the swift adoption of the proposal.  The discussions will be based on a discussion paper focussed on the debt write-down tool (bail-in).  A summary of the discussion paper will appear on this blog very soon.

Early indications are that the Commission will publish its formal proposal at the end of May / beginning of June.

The EU Commission’s website can be found at:

http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm