The UK government’s formal acceptance this week of the ring-fencing proposals set out in the Independent Commission on Banking’s report is a watershed moment for the country’s banks — and puts Britain ahead of Europe in regulation of the financial services industry.
But while Chancellor George Osborne’s apparent tough stance on banks — especially Royal Bank of Scotland — will go some way towards pleasing the electorate, a continuing lack of clarity about the implementation of bail-ins will weigh heavily on the minds of investors and issuers, stymieing supply at a time when funding markets desperately need to be unblocked.
The original ICB report, published in September, suggested that existing senior debt would not be grandfathered and therefore would be bail-inable from when the measures were implemented. But no final position was given.
Now we are three months further down the line, and all the government can offer on bail-in is yet more suggestions. Existing debt will probably be bail-inable, but the government will “revert to this issue in its White Paper next year, in the light of global regulatory developments”.
And judging by a list of questions at the end of the announcement, the government has not yet decided whether bail-in will apply to all unsecured debt or a specific category of bail-inable debt that would bear losses before other non-capital liabilities.
The senior debt market is of paramount importance for banks. Worries over bail-in regulation have threatened to close the market down entirely several times in 2011, and its spectre still haunts investors and issuers. The lack of clarity over whether existing debt will be grandfathered is one of the primary factors limiting supply, particularly at the longer end of the curve.
Banking reform will be a long and probably very bumpy road. But if the government wants to help banks fund themselves again, it must give senior unsecured investors a clear view of what they will be buying — and issuers a good idea of what they will be selling.