In the run-up to yesterday’s report from the Independent Commission on Banking, weary market participants were hoping for some clarity on bail-ins of senior unsecured bank debt. They didn’t get it.
While the report should be commended for taking bail-ins further as a thought exercise, investors and issuers are still waiting for an indication of exactly how these regimes will be implemented. And while they wait, the unsecured debt markets are floundering and bank funding is in crisis.
In the context of senior debt, much of the uncertainty is around grandfathering — whether existing senior debt will be excluded from bail-in under the new regulations. But as the report points out, the grandfathering of existing debt is unlikely, at least in the UK. After all, under the country's Special Resolution Regime, the authorities already have the power to impose losses on creditors.
That is a fair point. But the other reasons the ICB gives for rejecting grandfathering more broadly are far fluffier. First it claims that treating liabilities differently with reference to when they were issued is too complex. This is a poor excuse — how complex is it to look at a bond and determine whether it was issued before or after a certain regulation was implemented?
It then states that market participants are already beginning to regard long term unsecured debt as risk-bearing. This is a fudge but, ironically, it encapsulates exactly why concrete guidance on bail-in implementation is needed right now. The fact is that investors are not buying long term unsecured debt because they just don’t know the extent to which it is risk-bearing.
Many investors now accept that bail-ins will soon be a permanent part of the global regulatory framework. Regulators must now reply by giving them some clarity about how they will be implemented. The ICB report is, of course, an advisory document rather than a regulatory one. But the ball is now in the government’s hands.
Suggesting that the implementation of bail-in regulations could be pushed back for fear of spooking the markets is wrong-headed — all it does is confuse investors. Government must act swiftly to draft legislation and show the markets exactly how bail-ins will affect them.
It has been almost three months since the senior FIG market last saw primary issuance. Volatility in the eurozone can take most of the blame, but when it subsides, investors will once again focus on the bail-in issue that spooked the market before Greece stole the limelight.
And once again, they will ask what exactly is going to happen. If the market is to survive, let alone recover, they need answers.