By Helene Durand
Fri Nov 28, 2014 9:19am EST
LONDON, Nov 28 (IFR) - Europe's banking watchdog is hoping to achieve consistency with global regulators on the amount of loss absorbing debt the region's banks have to hold in order to avoid the need for taxpayer rescues.
The European Banking Authority released a 41-page consultation document on Friday that sets out the supervisor's thoughts on the criteria a bank's liabilities need to fulfil in order to be deemed eligible by resolution authorities.
While market participants will need time to digest the document, the EBA is aiming to be consistent with the Financial Stability Board, a regulatory task force for the G20 economies, which set out new requirements of total loss absorbing capital (TLAC) for globally systemically important banks earlier this month.
There has been much anxiety among market participants that the requirements could put continental European banks at a disadvantage because of their corporate structures .
"These are the proposed rules for how TLAC should be crafted in Europe," said Stefano Cappiello, head of recovery and resolution unit at the EBA. "It is consistent with the proposed FSB framework but takes into account the fact that we are setting requirements for all European banks."
"The concepts of TLAC and MREL [minimum requirement for own funds and eligible liabilities] are the same: it's about having a set of credible liabilities that are easy to identify and credible to be bailed-in," he said.
Cappiello added that the technical standards avoid a cliff effect whereby only certain, larger, banks would be affected. "The Directive requires for the rules to be implemented for all the banks in a proportionate way."
This means that domestic institutions not captured by the FSB requirements will still need to be resolution ready and will not be exempt as such.
One area of concern among market participants has been the need for TLAC eligible liabilities to be subordinated, which they say makes European banks' lives more difficult.
"The TLAC proposals have a baseline requirement for liabilities to be subordinated either contractually or structurally but there is no such requirement under the BRRD (Bank Recovery and Resolution Directive)," said Mark Adams, policy expert, recovery and resolution at the EBA.
"However, European resolution authorities are required to make sure that institutions are resolvable. They need to look at which liabilities can be bailed-in and whether bailing those in could undermine the purpose of resolution and lead to contagion even when it's legally possible."
He added that subordinated debt was one way of achieving this, but not the only one, and that it was up to the resolution authorities to address this on a case-by-case basis.
The EBA paper states that resolution authorities would need to either increase the MREL or take alternative measures, such as affecting the ranking of liabilities in insolvency.
HOW MUCH?
But while the EBA is clear in wanting to align the MREL standards with TLAC, it will not give a quantum in terms of how much banks need to raise.
One of the market's assumptions has been that banks would need to have 8% of bail-inable liabilities to meet the European resolution directive requirement. However, EBA's Adams said the directive did not set a minimum number.
"It is difficult to give an estimation of the quantum of capital banks will need to have as it will be on a case by case basis so we can't say in advance what it will be," added Cappiello. "Also, banks will need to take a look at their liability structure as this will be key to understanding their loss absorbing capacity."
The EBA said the draft technical standards enable resolution authorities to consider RWA-based capital requirements or leverage ratio requirements when setting MREL, but the final requirement must be set as a percentage of own funds and total liabilities.
This is likely to be a cause of frustration for banks as they won't know what requirements they need to meet until the resolution authorities have had a chance to look at their liability structure.
Cappiello believes the new requirements will ultimately result in enhanced disclosure and better pricing for bank debt.
"Analysts and rating agencies are looking more and more at banks' liability structure and their ranking in insolvency and ultimately, banks will be able to communicate how resilient they are," he said.
Market participants have until February to respond to the paper. (Reporting by Helene Durand)
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