December 2, 2016 / 9:26 AM / 9 months ago

Fitch: EU Harmonised Bank Creditor Hierarchy May Unlock Issuance

(The following statement was released by the rating agency) LONDON, December 02 (Fitch) An EU-wide harmonised approach to bank creditor hierarchy would reduce uncertainty for debt issuers and investors, Fitch Ratings says. It could also unlock debt issuance for EU banks. The European Commission has proposed a new statutory category of senior non-preferred unsecured debt that would rank below other senior liabilities. This, together with clarity on how debt would be treated until the new rules apply, would relieve uncertainty currently blocking a path for issuance of senior loss absorbing debt. There could be a large supply of new senior loss-absorbing instruments hitting the market in a short period of time, although the net debt increase will be much lower due to existing instruments maturing. High supply could make it more costly for the issuing banks and increase levels of polarisation, with small or weaker banks finding it harder and more expensive to build up the required buffers. Nevertheless, the proposals give banks a clearer path for issuing senior loss-absorbing debt. The proposals should also make bail-in easier, particularly of debt in cross-border groups, by reducing uncertainty for debt issuers, investors and resolution authorities. The new debt class would allow EU global systemically important banks (G-SIBs) to meet the Financial Stability Board's Total Loss-absorbing Capacity (TLAC) requirements. It also allows other EU banks to meet the EU's minimum requirement for own funds and eligible liabilities (MREL) in subordinated form. TLAC applies only to the 13 EU G-SIBs, while the conceptually similar MREL applies to most EU banks under the Bank Recovery and Resolution Directive. Resolution authorities set the level and the subordination of MREL on a case-by-case basis depending on the resolution strategy. Some countries have already started to adopt their own approaches to achieve the mandatory subordination of senior debt required to meet TLAC/MREL standards. The proposals seek to harmonise the creditor hierarchy across the EU, in light of the varying approaches already taken, without affecting the insolvency ranking of existing national law governed instruments France has already largely legislated for a new class of senior non-preferred consistent with the new rules. In Spain, banks can already issue subordinated 'Tier 3' debt, which sits above Tier 2 debt, although Tier 3 is not eligible as regulatory capital. No Spanish bank has yet issued in Tier 3 and we believe they may now wait to issue appropriate new instruments once the EU proposals are finalised Germany has already enacted retrospective legislation to subordinate vanilla senior bank debt to other senior liabilities from 1 January 2017. We believe the harmonisation approach leaves this plan intact, as we believe the new debt class will rank pari-passu with outstanding vanilla senior debt. Italy has introduced full depositor preference from 2019. This may be reviewed in light of the revised EU requirements, although depositor preference is not incompatible with creating a separate debt class. The UK's preferred holdco/opco structure for resolution should still work with the EU's credit hierarchy harmonisation. UK holding company resolution entities will issue bail-inable debt to third parties, which is then down-streamed to the operating bank, possibly in the form of the new senior non-preferred debt. The initial deadline to apply the new rules from 1 July 2017 is tight in terms of national legislative schedules, but necessary to give EU G-SIBs sufficient time to issue the debt to meet the TLAC requirements from 2019. MREL applies from 1 January 2016 but EU resolution authorities have the flexibility to determine an appropriate transitional period before setting a final deadline. The Bank of England, for instance, has set final compliance by 2020. Contact: James Longsdon Managing Director Financial Institutions +44 20 3530 1076 Fitch Ratings Limited 30 North Colonnade London E14 5GN Monsur Hussain Senior Director Financial Institutions +44 20 3530 1793 Alan Adkins Group Credit Officer - Global Financial Institutions Credit Policy Group +44 20 3530 1702 Cynthia Chan Head of Fitch Wire Credit Policy Group +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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