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It's been uncanny how all of Europe’s recently failing financial institutions have failed in just the right way to ensure the most favourable outcome for the competent authorities.
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When Banco Popular lost the market's confidence, it ran out of road. Realistic assumptions for recovery rates on bad assets plunged to super-conservative levels. Confidence is the greatest form of solvency, its withdrawal a precursor to insolvency.
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For every step forward that the Masala bond market takes, it goes two steps backwards, with the Reserve Bank of India recently putting up barriers to keep high yield issuers out of offshore rupees. Cutting off low grade Masala issuance isn’t the worst thing to come out of the central bank’s announcement — the rules could also stifle investment grade deals. -
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Banco Popular Espanol’s covered bonds barely reacted to credit stress afflicting bonds further down its capital structure ahead of the Spanish lender’s resolution on Tuesday evening. This may have illustrated the effectiveness of the Covered Bond Purchase Programme (CBPP3) but also showed confidence in the asset class, the regulator and the Spanish banking system.
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Soon, banks will have more TLAC and MREL than equity. The new bond classes are a immensely important part of the financial structure of a bank, but the risks to investors aren’t yet clear. Just how will this alien new instrument class behave — or misbehave?
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As the UK Labour Party’s Jeremy Corbyn bounces in the polls, his party’s plans for the financial system owe much to the German model — and have similar weaknesses and strengths.
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There are few barriers and obvious incentives to entering the non-preferred senior market. Smaller European banks should join the party.
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Moody’s covered bond ratings are now almost as lenient as those of DBRS, which shouldn’t weaken faith in either agency — arguably, it is Fitch and S&P that have lagged behind. But as the ECB stops buying, trust in ratings will be all the more important.
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Central banks should focus on the risk of cyber attacks when developing new stress testing scenarios for financial institutions.
