21 July 2017

Financial Times: How Italian banks are disadvantaged by new MREL rules

The author writes that time is ripe for authentically shared solutions, starting with a federal bad bank charged to purchase EU banks’ NPLs at reasonable prices and re-engineer their risks through well-thought securitisation schemes.

It’s hard to be a confident investor in Italian bank debt. The recent rescues of Monte Paschi di Siena, Popolare Vicenza, and Veneto Banca are simply the latest reasons over the past few years.

Markets have responded by cutting off bond funding to Italian lenders. The amount of Italian bank bonds outstanding has shrunk by about 30 per cent since the start of 2015.

The decline in volumes has gone along with increasing yields on subordinated and senior unsecured notes. This is not a small matter for a country where bonds have traditionally been an important share of banks’ liabilities.

Making matters worse is Europe’s new Bank Recovery and Resolution Directive (BRRD). Each credit institution has to meet a Minimum Requirement for own funds and Eligible Liabilities (MREL) eligible for bail-in in order to prevent tax-payers bailouts and – possibly – the involvement of creditors sitting in the top ranks of the repayments’ hierarchy.

Simulations performed on the top 162 EU banks in terms of Tier 1 capital show that on average Italian banks have a MREL between 11.7 per cent and 13.3 per cent of the total assets, considerably higher than French, German and even Spanish institutions.

Italian banks have the second-highest gap between their MREL and their aggregated Tier 1 and Tier 2 capital. That gap is worth about 5 per cent of assets, depending on the simulation used. Only Portuguese banks fare worse. Italian credit institutions will have to rely more on liabilities other than subordinated debt to meet the MREL, compared to their European competitors.

Italian banks need to add between €79 and €111 bn in subordinated debt financing under these rules. That’s less than other countries such as France (€97-197 bn) and Spain (€98-135 bn), but their banking systems are larger than Italy’s in terms of total assets.

Italy will have to work hard to comply with these new rules. One solution could be the issuance of senior non-preferred notes, i.e. debt securities safer than subordinated bonds but without any collateral or preference and, hence, eligible to take losses in a bail-in. In France, large groups such as Crédit Agricole have already issued senior non-preferred bonds (introduced by a decree of November 2016) and last June 23 also Spain adopted a similar decree.

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