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Banks in 2020: a new world order


GlobalCapital has put together a series of charts looking at the financial institutions bond market in 2019 and beyond.

MREL: a new model for subordination

Lawmakers put pen to paper on a huge package of regulatory reforms for banks in 2019, including important clarifications to the minimum requirements for own funds and eligible liabilities (MREL).

When it comes to the new issue markets, the big question for EU banks has been about how much of their MREL targets need to be met with subordinated liabilities — debt ranking below ordinary senior obligations in an insolvency.

The new legislative agreement has established a minimum subordination requirements for banks, but the maximum level of subordination will ultimately be determined by the Single Resolution Board and national competent authorities.

The 2020s: A decade of deadlines

Bank funding officials have a host of deadlines to think about as they move into the new decade.

Immediate concerns about the need to repay more than €700bn borrowed through the European Central Bank’s targeted longer term refinancing operations (TLTRO) have been brushed aside, given that the cheap funding scheme has been extended for another four years. But banks will still need to think about tapping the market for new sources of long-term financing, which will ultimately be required of them when the net stable funding ratio comes into force in the middle of 2021.

Overarching these considerations is the need to get in line with MREL by January 2024. This new set of EU rules demands that banks have enough bail-inable debt to deal with a crisis.

The Covered Bond Directive

After about five years of political work, the European Union came together to agree on a Covered Bond Directive in April this year. The agreement will act as a single reference point for covered bond rules, effectively harmonising treatment of the asset class within the EU.

It strengthens the definition of covered bonds and cover pools, sets out the responsibilities of supervisory authorities and introduces two new labels for compliant securities: premium and ordinary.