12 October 2015

Financial Times: Europeans move to undercut global bank capital rules

France is set to become the latest country to introduce legislation that would save its leading banks from having to issue tens of billions of euros of bonds to meet the rules agreed by global regulators a fortnight ago. Italy and Germany have begun similar processes.

Brussels officials are so worried with the divergence in policies that they have started talks with EU countries on a more co-ordinated stance. Market insiders said investors were frustrated and that all banks could end up paying more when they issue debt.

The rules on “total loss absorbing capacity” (TLAC) agreed on September 25 by the Financial Stability Board are one of the final pieces of post-crisis regulations designed to ensure there is never a repeat of the bank bailouts of recent times.

In the UK and Switzerland, banks such as UBS, Credit Suisse and Barclays are building up their “loss absorbing capital” by issuing new debt from bank holding companies that can be “bailed in” in a crisis. The banks will have to issue tens of billions of the new bonds to meet their TLAC requirements.

In Germany and Italy, however, legislators are passing laws to make traditional senior debt easier to bail in. This frees their banks of the obligation to issue debt for TLAC. Several people close to the situation said France would also propose a solution to help its banks.

“Being a European authority we would always argue that it’s a good idea to put in place a European solution, and not try to come up with 19 or 28 solutions on that,” said Elke Koenig, president of the Single Resolution Board, the new EU-wide resolution authority for failing banks.

“We’ve clearly given our support to the basic idea [of the German bank law] at the same time saying it would be preferential longer term to have a European solution.”

A senior capital markets banker said that the divergence in European countries was problematic. “What the US investors have heard is that there is no consensus in Europe,” he said, adding that this is a source of frustration. In a position paper, Dutch lender Rabobank warned that senior bank funding was being placed “at risk” by the German adaptation.

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