BRUSSELS (Reuters) - Banks in the European Union have been told they may face large capital gaps if the bloc and Britain do not agree on how to treat their loss-absorbing debt after Brexit, EU banking watchdogs said on Friday.
Under new banking rules meant to reduce taxpayers’ costs in banking crisis, EU lenders are required to issue a sufficient amount of debt that would be written down, or bailed-in, to absorb losses if they fail.
The European Banking Authority estimated that 276 billion euros ($326 billion) of debt will have to be issued by banks in the EU to meet the regulatory targets, warning that markets may find it difficult to absorb it.
Brexit may make things more complicated.
Most banks in the EU have issued loss-absorbing capital under British law, which could make it not compliant with EU rules on bank rescues in the event of a hard Brexit, EBA chief, Andrea Enria, told a banking conference in Brussels.
“What will happen to these instruments if the UK becomes a third country? Banks need to start thinking about that and authorities need to prepare,” Enria said.
“We started to alert banks,” over these possible risks, Elke Koenig, who chairs the EU agency in charge of failing banks, the Single Resolution Board, told a news conference on Friday.
Regulators face this problem for all bank debt issued under foreign jurisdictions that, in the absence of mutual recognition agreements, may not allow it to be wiped out to rescue a bank.
With Brexit the headache would be exponentially bigger because a large part of EU banks’ debt is currently issued under British law.
Part of this debt, known as MREL, is short-term and will be paid back before Britain leaves the bloc in 2019, but the longer-term liabilities are likely to remain pending after Brexit, Enria told Reuters on the sidelines of the conference.
Without a deal on how to treat them, banks may not be able to use them to absorb losses and would in turn be obliged to issue new MREL debt.
Enria said that contractual clauses may need to be inserted into debt contracts to address this uncertainty. “Or banks should rather issue (debt) under different law,” he said.
Reporting by Francesco Guarascio @fraguarascio; Editing by Gareth Jones