Several banks in Europe could start issuing expected loss notes in earnest next year if they decide to move their conduits off-balance sheet, according to market professionals. The banks would seek to move conduits off-balance sheet to avoid increased regulatory capital costs that will come into effect under new International Financial Reporting Standards in January.
French banks are likely to lead the charge. The Commission Bancaire already moved earlier this year to assess regulatory capital for on-balance sheet conduits based on total conduit assets, rather than the bank's conduit exposure, which would have increased capital requirements substantially. "We are currently working with two French banks which are looking seriously at off-balance sheet solutions under IFRS," said Mark Nicolaides, partner at Mayer, Brown, Rowe & Maw in London. So far only one German bank with a U.S. listing has issued ELNs and those were acquired by U.S. investors.
ELNs arose as the preferred method of achieving off-balance sheet treatment for asset-backed commercial paper conduits in the U.S. at the end of 2002, following the finalization of FIN 46R by the Financial Accounting Standards Board. The notes are deeply subordinated investments which come at the bottom of the payment waterfall, and selling them enables a bank to sell the majority of expected losses in its conduit--thus removing the need to consolidate the conduit for U.S. accounting purposes.