The ECB's 12-page bank review update released on February 3 devoted less than one page to recapitalisation. It indicated how much capital banks will require and how they can extend any deadlines for raising it. But it did not mention how banks should prioritise or balance the means of recapitalising at their disposal, including shedding loans, retaining profits and raising equity. Nor did it provide insights on the effects of each combination of mechanisms on the economy.
An RQR that effectively complements the AQR would address these concerns head-on. Rather than risking triggering market confusion or even panic, banks could set forth their recapitalisation plans with the backing of the ECB. The ECB could provide forward guidance on how the stress tests would affect the transmission of monetary policy into the real economy. National authorities could assess the impact on their economies. Businesses could gauge their bank financing options. Voters' confidence in the financial sector might actually be strengthened.
An expanded RQR would also address the wider structural risks inherent in recapitalising banks... The most major risk lies in bondholder bail-ins. The Bank Recovery and Resolution Directive will introduce the principle of bail-ins from 2016, but there are concerns that the EU could attempt to fast-track bail-ins for senior unsecured bondholders as a means of recapitalizing banks that fail the AQR.
If introduced this year or next, this could raise the cost of capital for banks and undermine lending. An RQR would help highlight those banks where "conventional" recapitalisation is impossible, and allow investors and national regulators to prepare for a potential bail-in.
Full article (subscription)
© Wall Street Journal
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article