Crunch time for bank capital
Metro Bank joined Deutsche Bank this week in demonstrating how regulatory debt capital issues drive fears over business sustainability. Will regulators get cold feet and pull back?
Metro managed to meet its deadline for raising debt capital on Wednesday, with a £350m bond. But paying a 9.5% coupon for senior debt is a heavy price when the Bank of England base rate is 0.75%.
The share price nevertheless jumped by around a fifth, erasing some of the losses after its failed attempt to raise the debt last week. While the bank did not appear to be on the brink of an actual capital or liquidity squeeze, for shareholders its compliance with minimum requirements for own funds and eligible liabilities (MREL) was key to its viability.
Meanwhile, earlier this year Deutsche’s ability to carry out its planned restructuring was made “more feasible” by a rule change giving it more freedom to pay coupons on additional tier one bonds, its finance chief said. Otherwise, the restructuring costs could have prevented it servicing the bonds, shutting it out of that critical market.
Tougher capital requirements are designed to make banks less likely to fail, and make failure less burdensome for the state. It comes at a time of low rates. While this may entice yield-hungry investors to riskier debt, more fundamentally it challenges banks’ entire business models.
While the sector as a whole is better capitalised, European regulators have to make a choice for the banks where a regulatory capital issue threatens to be the catalyst for a confidence problem.
Option one: hold fast on the rules and risk a disruptive death spiral, which at least would help push banking consolidation. Option two: ease off on the deadlines and find other ways to help the banks, such as through long-term funding schemes.
The Bank of England may have escaped this choice for now, but unless the rates environment changes, it will crop up in Europe again.