BRUSSELS/LONDON (Reuters) - Smaller euro zone banks may not need to hold bonds that can be wiped out to plug losses in a crisis, the head of the body responsible for resolving failed banks told Reuters.
Elke Koenig, chair of the Single Resolution Board (SRB), also warned in an interview about the effect of low interest rates on banks and backed curbs on their holdings of sovereign debt.
The SRB is responsible for deciding how much debt, known as MREL, the euro zone’s main banks must hold on top of their capital buffers.
This debt can be “bailed in” or written down if the bank gets into trouble to avoid taxpayers footing the bill.
“When you consider we are setting MREL for the largest institutions in the banking union, it’s fairly safe to state that MREL of not less than 8 percent is probably the rule, it could even be beyond,” Koenig told the Reuters Regulation Summit.
On Wednesday, Reuters reported that draft legislation from the European Union’s executive Commission on MREL will contain no minimum amount.
But the MREL requirement for smaller banks could be below 8 percent because if they got into trouble, they could be closed down quickly and the deposits transferred to another lender, she said.
“If you come to the conclusion that a bank, if it fails, goes under a normal insolvency procedure like in other industries, then the argument for MREL is getting very limited or disappearing because you would just unwind the institution,” Koenig said.
She said she would “personally sign up” to the Bank of England approach which sets out three “buckets” for determining how much MREL a bank should hold.
In the first bucket, banks with fewer than 40,000 accounts and that can be shut under normal insolvency rules won’t have to hold MREL.
Koenig said some banks under SRB supervision might be small enough to require only very limited amounts of MREL or none at all, a move that could reduce risks for shareholders and bondholders of smaller lenders.
Last year hundreds of people in Italy lost their savings when retail bondholders’ holdings were used to help bail out four small lenders. That led to calls for new bail-in rules to be adjusted so they did not inflict such large losses on ordinary retail investors.
In setting up the appropriate MREL for each bank under its remit, the SRB is also looking at the quality of banks’ assets to be sure that a bail-in can take place quickly when required.
For this purpose banks should hold a certain amount of junior debt, such as riskier bonds, that is easier to wipe out in case of resolution.
“You can expect us to request a certain amount of MREL to be subordinated,” Koenig said, stressing that “it must not be the entire amount and will depend on the individual institution.”
In drawing up precautionary plans for possibly winding down some 140 lenders under its watch, the SRB is considering risks to banks’ activities and profitability. One of these risks is low interest rates, Koenig said.
The risks linked to a possible British vote to leave the EU are not currently taken into account, but may become an issue after the June 23 referendum.
“I would not think this is a very specific topic for now for us,” Koenig said.
Another risk facing euro zone banks in some member states is excessive exposure to sovereign debt of their own country, which is currently considered risk-free and subject to no holding limits.
There was no such thing as a “risk-free asset,” Koenig said. EU finance ministers, under pressure from Germany, are discussing options to limit banks’ exposures to public debt or increase its cost.
“To consider risk in sovereign bonds is acknowledging economic reality,” Koenig said, supporting the bolder option of setting caps on sovereign holdings. “Concentration limits could be by far more powerful,” as a tool to reduce sovereign risk, she said.
Some euro zone countries, including Italy and France, oppose such limits, fearing negative consequences on their banks’ balance sheets and for bond markets.
Koenig usually refrains from talking about specific countries and banks, but did not shun comments on Italy’s newly-established Atlas fund - Atlante in Italian -, an initiative mostly funded by domestic private banks to bail out weaker Italian lenders and avert a wider crisis in the euro zone’s fourth-largest banking sector.
“The Atlante fund, as it is accumulating private money from very diverse sources, is and can be a good first step in a solution,” Koenig said.
The fund has become the majority owner of Banca Popolare di Vicenza IPO-BPVS.MI immediately after its establishment, a move that the SRB will monitor, Koenig said.
Editing by Adrian Croft