Proposed amendments to the EU Bank Recovery and Resolution Directive (BRRD) regarding minimum levels of bail-inable subordinated debt may make it harder to effect a bail-in resolution on mid-sized banks that run into trouble, Fitch Ratings says.
Minimum subordinated debt requirements may only apply to global systemically important banks (G-SIBs) and “top-tier” banks with assets above EUR100 billion, according to a draft paper to be discussed at a European Council meeting on Friday.
This EUR100 billion threshold to designate a top-tier bank would be at the top of the range previously proposed, and could make it more difficult to apply bail-in to mid-sized banks under the EU’s bail-in framework. This may be because of legal challenges from bondholders that are bailed in if equally ranking creditors (eg junior depositors) are not or because of financial stability risks of bailing in equally ranking retail bondholders and junior depositors alongside institutional bondholders.
The EUR100 billion cut-off is particularly relevant to markets with less concentrated banking systems, for example Italy and Spain, and to smaller EU countries. For banks below the threshold, it could be challenging and costly to issue large amounts of subordinated debt, particularly for smaller banks with a more limited footprint in the debt capital markets. Consequently, mid-sized bank senior creditors may miss out on the protection the subordinated buffers would have provided.
How widely minimum subordination requirements should apply has been a matter of contention. Some northern EU member states want a broader scope covering at least all of the “other systemically important institutions” (O-SIIs), to minimise contagion risk. Others, mainly southern EU member states, want to limit the application to avoid forcing any but the largest banks to build subordinated debt buffers. An amendment originally proposed by Belgian delegates provides resolution authorities with the option to request subordinated minimum required eligible liabilities and own funds (MREL) for banks deemed systemic – but this is not automatic, as it is for the top-tier banks and GSIBs.
The European Council’s draft BRRD paper also proposes capping for most banks the requirement for subordinated MREL at 8% of a bank’s total liabilities and own funds. This would limit the associated costs for banks, but would leave their senior creditors less well protected in the event of outsized losses.
Friday’s discussions will also seek to agree a timescale for banks to meet the new requirements. The draft proposes G-SIBs and top-tier banks will have until January 2022. Other banks subject to the requirements will be given until 1 January 2024, but some EU member states are seeking longer timescales as some banks may struggle to build buffers, particularly if they are deposit-funded and have not issued subordinated debt previously.
