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19 May 2014

FT: Europe banks face clampdown on debt sales


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The EBA is concerned about the sale of bank debt that could be bailed-in if the bank’s capital got too low or it faced bankruptcy. Over the past few months, banks have rushed to sell larger amounts of debt that can be converted into equity as they attempt to strengthen their capital buffers.


The EBA wants to ensure that lenders do not target investors without making them aware of the hazards of debt that is not protected by deposit guarantee schemes. Analysts say that complex instruments such as contingent convertible bonds – which convert to equity when a certain threshold is reached – are not currently being sold to retail investors, but regulators are keen to avoid the mis-selling scandals that have plagued Europe’s financial sector in recent years.

According to EU officials, the EBA is considering issuing a public warning to customers about the perils of certain types of bank debt. It could also set forth guidelines on the subject, or request a mandate from the European Commission to take further action. Possible next steps would include banning the promotion of certain products to retail customers, demanding upfront disclosures of the lack of deposit protection, or requiring individuals to sign declarations that they are aware deposit guarantees do not cover their investments.

"I think they [regulators] are right to take this seriously because we have to protect retail customers", said Khalid Krim, head of capital solutions in Emea at Morgan Stanley. "But I’d be very surprised if any cocos or other such products had been sold or actively marketed by European banks to their retail clients in the last two years."

Britain’s Financial Conduct Authority (FCA) has already said it is planning to consult on new rules to make sure cocos are only marketed to experienced investors. But EU supervisors are still anxious to prevent any future scandals. The EBA’s board – which convenes the 28 EU banking supervisors – is expected to discuss measures to ensure depositors are better protected in the coming months.

An EBA spokesperson said: "The EBA is looking into the issue as part of its mandate to protect EU consumers in financial services, while it is too early to comment, we remain fully committed to identifying detriment consumers may experience in their dealings with banks."

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© Financial Times


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