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Senior non-preferred (SNP) bonds are debt instruments designed to prop up banks in a future financial crisis. They can be converted to equity or “bailed in” if a bank’s losses wipe out its capital buffers.
In theory, ample bail-in debt will require bondholders, rather than taxpayers, to recapitalise banks that regulators and governments deem too big to fail, if or when the next crisis hits.
The world’s largest banks, which pose the greatest systemic risk, must raise bail-in debt equivalent to 18 per cent of their risk-weighted assets by 2022, under rules from the Financial Stability Board, the international body that monitors the global banking system.
In the EU, policymakers have gone further by stipulating that most banks, including small and medium-sized lenders, must meet a bail in-debt hurdle known as the “minimum requirement for own funds and eligible liabilities”, or MREL.
Although banks can meet the requirements using more established types of debt, policymakers in Europe have in recent years legislated to introduce SNP bonds.
Issuance of SNP bonds in Europe has increased markedly since their introduction, from €68bn in 2016 to €85bn in 2018 and more than €100bn expected this year, according to the S&P Global Ratings figures. French banks were the biggest issuers in 2019, followed by Italy, Germany and Spain.
Some investors had worried about banks’ debt servicing costs rising as they issued the new bonds, which are riskier than senior debt and so therefore pay higher rates of interest.
However, the extension of negative interest rates in the eurozone, which have hurt banks in most other respects, has made it relatively easy for lenders to sell SNP bonds to investors on the hunt for assets that offer higher interest yields.
Full article on Financial Times (subscription required)