By Huw Jones
LONDON, June 2 (Reuters) - Banks must spell out the risks to investors in buying so-called bail-in bonds that can be written down to shore up an ailing bank, the European Union’s markets watchdog said on Thursday.
Banks are having to issue such bonds to top up their core capital reserves and help them to cope with severe market shocks without calling on taxpayers to rescue them.
The European Securities and Markets Authority (ESMA) said in a statement that banks were likely to issue a significant amount of such debt, but retail investors in particular might not be aware of the risks they may face.
ESMA said an analysis of complaints from investors showed some buyers were wrongly told the bonds were as safe as a bank deposit or were protected by a deposit guarantee scheme.
Last year hundreds of people in Italy lost their savings when retail bondholders’ holdings were used to help bail out four small banks, and the regulator is anxious to ward off potential mis-selling scandals.
The issue has a broader significance too beyond the protection of retail investors, given sharp falls in European banking shares earlier this year were partly blamed on the introduction in January of EU rules known as the Bank Recovery and Resolution Directive (BRRD) that govern bail-in debt.
“Investor protection is a core part of ESMA’s mission and we are concerned that investors may find it hard to understand the risks inherent in these investments given the complexity and novelty of the BRRD regime,” ESMA Chairman Steven Maijoor said.
Regulators now have powers to “resolve” a failing bank by writing down its bonds, even if the lender does not actually go bust, triggering insolvency proceedings.
Analysts said the slump in banking shares was partly due to investors realising that effectively any bonds in a troubled bank could take a hit, making such bonds harder to price.
During the 2007-09 financial crisis, bondholders in ailing banks were shielded from the multi-billion euro losses suffered by shareholders and plugged by taxpayers.
The powers to write down bonds also cover debt issued before January and ESMA wants banks to go back to investors and explain that such older debt could potentially take a hit as well.
In 2014 Britain’s Financial Conduct Authority imposed restrictions on the sale of a similar type of bank bond, known as contingency capital or Cocos, to retail investors. (Editing by Jane Merriman and David Holmes)