February 3, 2017 / 12:32 PM / 9 months ago

Irish banks set off down holdco road

LONDON, Feb 3 (IFR) - Bank of Ireland and Allied Irish Banks, Ireland’s two largest lenders, are on course to set up holding companies to help them meet regulatory requirements designed to facilitate future bank resolutions.

Bank of Ireland said in a statement on Friday that the Single Resolution Board, together with the Bank of England, had indicated its preference for a single point of entry bail-in strategy through a group holding company.

It expects to establish a holding company, which would become the parent company of the group.

The SRB has also notified Allied Irish Banks that its preferred resolution strategy for the lender is a single point of entry via a holding company.

This approach had been widely expected and puts the Irish banks - including Permanent TSB, which already has a holdco in place - on a level footing.

Like their European peers, Irish lenders must issue billions in loss absorbing debt to meet the incoming European MREL standard.

DIVERGING PATHS

However, the setting up of a holding company promises to drive a deeper wedge between European bank resolution strategies as a two-track system emerges.

While Irish and UK banks ramp up holdco issuance, lenders in France and Spain are issuing new forms of senior debt out of their operating companies, an approach endorsed by the European Commission late last year.

Neither bank has indicated how long it will take to set up a holdco, but Bank of Ireland said it would require shareholder approval. Analysts at Davy expect them to be set up during the second half of 2017.

“We would be hopeful that given the time required to set up the holdcos that Irish banks may receive additional time - as with the UK banks - in order to issue the required amount of new debt to satisfy their MREL requirement, the amount of which is also yet to be confirmed,” Davy’s Stephen Lyons wrote in a note.

The Bank of England said in November that it would extend the deadline for UK banks to meet their MREL by two years, to 1 January 2022.

The SRB’s decision also has ramifications for existing bondholders of Bank of Ireland and AIB.

Bank of Ireland said that while the decision was not expected to impact its Common Equity Tier 1 ratios, a holdco structure may knock its Total Capital and Tier 1 capital ratios due to minority interest deductions applied to externally-held subordinated debt issued out of subsidiaries beneath the holdco.

BNP Paribas analysts said the impact on capital ratios should materially reduce the extension of risk of these instruments.

“We expect the bonds to be redeemed and replaced at the holdco level over time,” they added. (Reporting by Alice Gledhill, editing by Helene Durand, Julian Baker)

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