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Muffle the MREL alarm bells

By Tyler Davies
01 Aug 2017

The European Banking Authority (EBA) is probably worrying too much when it says that banks could struggle to find buyers for their loss-absorbing debt.

The supervisory body warned in a report on funding plans this week that bank debt issuance will surge in the next two years, as issuers start piling into the market with trades designed to help them meet the EU's minimum requirement for own funds and eligible liabilities (MREL).

“The assumed deferral of MREL issuances to 2018 and 2019 raises questions about market absorbability and associated pricing, especially at a time when reliance on public sector sources of funding may decrease,” said the EBA.

That seems like a very rational conclusion to have drawn — if banks have to flood markets with a load of funding and capital trades at the same, supply fatigue will set in and deals will either have to be pulled or investors will demand higher prices.

But financial institutions hardly seem to be panicking about pushing a bucketload of MREL-eligible debt onto their investors, despite the EBA’s projections this week.

Nearly every one of Europe’s global systemically important banks (G-SIBs) have already found a method of raising MREL-eligible senior debt and have started making real progress on their funding targets.

People were worried at the end of last year that there may not be an enthusiastic investor base to welcome the arrive of non-preferred senior debt in France — a new asset class that resolution authorities can bail in before ordinary senior debt and after tier two if a bank runs into trouble. 

But since then, investors have supported close to €20bn of non-preferred senior issuance from France’s four G-SIBs, and spreads have done nothing but grind tighter and tighter.

Large banks have made similar progress in the UK. Barclays said this week that it was already more than 75% through its MREL issuance guidance of £10bn for 2017, for example, and HSBC confirmed that it had pared back its supply target for loss-absorbing debt.

That leaves Europe’s non-G-SIBs, which don’t have the added worry of complying with the total loss-absorbing capacity standard — the global capital standard designed by the Financial Stability Board.

Most of these financial institutions are still waiting for clarity from their respective national legislatures before they start issuing new forms of explicitly bail-inable senior unsecured debt. But they should still have plenty of time to assess their plans and talk to investors about their MREL costs.

If the Bank of England's MREL communication is anything to go by, banks in Europe could have until 2022 to meet their final requirements. That's three years beyond the EBA's planning horizon — plenty of time for the regulator to relax, and leave the MREL worries aside.

By Tyler Davies
01 Aug 2017