European banks on track to issue record €100bn of ‘bail-in’ debt in 2019
Bonds are designed to bolster balance sheets in event of future financial crisis
European lenders are on track to issue a record €100bn of new “bail-in” debt in 2019 to meet tougher post-crisis rules designed to protect taxpayers from footing the bill for future bank failures.
Banks in Europe had already issued €94bn of “senior non-preferred” debt by early December, according to figures prepared for the Financial Times by S&P Global Ratings, and are expected to pass the €100bn mark by the end of the year.
Senior non-preferred (SNP) bonds are debt instruments designed to prop up banks in a future financial crisis. They can be converted to equity or “bailed in” if a bank’s losses wipe out its capital buffers.
In theory, ample bail-in debt will require bondholders, rather than taxpayers, to recapitalise banks that regulators and governments deem too big to fail, if or when the next crisis hits.
The world’s largest banks, which pose the greatest systemic risk, must raise bail-in debt equivalent to 18 per cent of their risk-weighted assets by 2022, under rules from the Financial Stability Board, the international body that monitors the global banking system.
In the EU, policymakers have gone further by stipulating that most banks, including small and medium-sized lenders, must meet a bail in-debt hurdle known as the “minimum requirement for own funds and eligible liabilities”, or MREL.
Although banks can meet the requirements using more established types of debt, policymakers in Europe have in recent years legislated to introduce SNP bonds.
Issuance of SNP bonds in Europe has increased markedly since their introduction, from €68bn in 2016 to €85bn in 2018 and more than €100bn expected this year, according to the S&P Global Ratings figures. French banks were the biggest issuers in 2019, followed by Italy, Germany and Spain.
Alexandre Birry, an analyst at S&P Global Ratings, said: “This year promises to be a record year in terms of issuance of new senior non-preferred instruments in Europe.”
Mr Birry forecast that 2020 would be another record year, as additional European countries pass legislation to introduce SNP bonds, allowing more banks to come to market, “although at some point we will see a plateauing”.
Some investors had worried about banks’ debt servicing costs rising as they issued the new bonds, which are riskier than senior debt and so therefore pay higher rates of interest. In November 2018, UniCredit, Italy’s largest bank, offered a hefty 7.83 per cent coupon on an SNP bond.
However, the extension of negative interest rates in the eurozone, which have hurt banks in most other respects, have made it relatively easy for lenders to sell SNP bonds to investors on the hunt for assets that offer higher interest yields.