Investors wake up and smell the bail-in
It may have taken a few years, but bank bondholders have snapped and demanded better information from regulators as to how exposed they really are when a bank runs into trouble.
ICMA this week published a letter sent to the supervisory arm of the ECB at the end of July, demanding a simpler, more transparent and more predictable bank resolution process (see Financial Institutions section).
Investors have had constant bilateral discussions since regulators started redrawing the bank capital hierarchy seven years ago, but remarkably this is the first time a meaningful group of them have got together to complain about the mounting uncertainties they face.
The letter lists several concerns, but chief among them is that senior unsecured investors simply do not have enough information to predict how regulators will treat their debt.
Many senior investors argue common equity tier one (CET1) triggers of 5.125% and 7% are essentially meaningless when minimum capital for European banks is around 12%-13%. They believe regulators will intervene before CET1 even gets into single figures. The problem is they have no idea how or when.
The rules of the game have changed with alarming frequency in the last couple of years. The Greek version of bail-in has already seen SME deposits suddenly elevated to protected status at the expense of senior debt. It is another worrying sign for investors, who are looking at ostensibly global rules being enforced by national regulators, who, now more than ever, have public opinion to contend with.
As one investor involved in the discussions put it, they were already underwriting the credit risk of banks, but they are now effectively underwriting regulators and their ability to do an effective and fair job.
AT1 investors are handsomely rewarded for that unquantifiable risk, whereas senior bondholders are not.
Publicly investors have been too quiet on this issue for too long. That is partly because there were too many regulators to shout at. Now supervision has been centralised under the ECB, they have to hope they are not too late.