* Statutorily subordinated senior bonds can be pledged as
* Non-preferred senior still left out in the cold
By Alice Gledhill
LONDON, Oct 6 (IFR) - German banks scored a major coup this
week after the European Central Bank confirmed that their senior
unsecured debt would remain eligible as collateral even after
changes to insolvency rankings kick in from January 2017.
The ECB's statement on Wednesday cleared up a key question
hanging over the sector since Germany first proposed
subordinating senior unsecured bonds to other senior liabilities
to help its banks tackle new loss absorbing requirements.
European countries have been grappling with how best to
implement bail-in rules in local laws, resulting in a wide range
of solutions and vastly different looks for the new style of
The news that the ECB will take a lenient approach is a
particular boon for the German Landesbanks.
"This is a highly politicised decision," said one banker.
"Collateral is important for the Landesbanks and they will
be able to keep buying each other's senior."
Savings and Landesbanks are said to have lobbied for the
asset class to remain ECB repo eligible, a key reason for bank
treasuries to buy these securities.
The development aligns German senior with structurally
subordinated senior debt, such as the senior bonds that UK banks
issue out of their holding companies.
"This is a positive," said a second banker. "By having a
wider investor base, you can get more price leverage and maybe
achieve tighter pricing."
KICK IN THE TEETH
The outlook is not so rosy for other jurisdictions, however.
The ECB at the same time reaffirmed February's statement that
statutorily subordinated unsecured bank bonds that are also
contractually subordinated will not be eligible.
That includes non-preferred senior, of which the French
banks are set to be major issuers, potentially leaving them at a
disadvantage compared to their European peers.
"In our view, aside issuer specific credit risk or available
subordinated buffer considerations, this will be a pricing
negative for senior unsecured bonds eligible for bail-in to be
issued in the latter format going forward," said Maureen
Schuller, head of financials research at ING.
NOT A CLOSED BOOK
But the ECB made clear in Wednesday's statement that further
changes are likely next year as the direction of insolvency
regimes across Europe become clearer - one of the hottest and
most toxic topics in the financials debt market.
"This is not a stable situation, in our view. Ultimately it
will need to be regularised," said Richard Thomas, a research
analyst at Bank of America Merrill Lynch.
European countries have started taking steps to subordinate
senior unsecured debt so that it can be used to beef up loss
absorbing buffers, with the aim of shifting the cost of failing
banks from taxpayers to creditors.
However, the European Commission fears that the diverging
solutions adopted by Germany, France and Italy threaten to
create competitive distortions and complicate the bail-in tool.
As part of its statement, the ECB reaffirmed its support in
reaching agreement on a common EU approach to the creditor
hierarchy in bank insolvency and resolution, and notes that work
is ongoing in this respect.
"The ECB will review this decision during the course of
2017, and the collateral eligibility framework eventually
applicable to unsecured bank bonds will also reflect progress
made within that period towards a common EU approach," it added.
(Reporting by Alice Gledhill, editing by Helene Durand, Julian