As European policymakers gathered this week to discuss CRD IV and CRR I, rumours flew around the capital structuring community that the rules for selling tier two bonds are about to get tougher. After the Basel Committee publicly reprimanded the EU for being “materially non-compliant” with Basel III in October, policymakers seem to be rethinking their approach.
Of most concern to banks and structurers are potential changes to loss absorbency at the point of non-viability. These loss-taking rules had been long accepted. But they were expected to take effect from 2015 through the recovery and resolution directive. However, banks may now have to include contractual loss absorbency clauses as soon as next year — a bridge measure until a statutory resolution regime comes into effect in 2015.
That could add 50bp to the cost of issuing tier two paper, bankers reckon. Additionally, there are the legal hurdles and increased investor uncertainty over what they’re buying — clauses and rules could well vary between jurisdictions.
Meanwhile, those banks that joined the rush to print tier two transactions this year — in the belief that contractual loss absorbency language would not be required — will be wondering what capital credit their instruments will receive once CRD IV and CRR I are in place.
The shenanigans show the problems inherent in drawing up new rules. The alternatives need careful consideration and the drafts need close scrutiny to avoid arbitrage opportunities. But timeliness is also crucial. The development of CRD IV, CRR I and the recovery and resolution directive have been unnecessarily drawn out.
Bank supervisors the world over are pushing lenders to increase their loss absorbency. Their preference is clearly for common equity capital. So a cynic could suggest that supervisors are less concerned about banks finding it difficult to sell hybrid and subordinated debt with confidence.
But Europe is happy to allow banks to include such securities in their capital structure. It should nail down the details soon and let the banks get on with raising capital, in all its forms.