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Commission cracks the whip on creditor hierarchy harmonisation
March 17, 2017 / 4:33 PM / 9 months ago

Commission cracks the whip on creditor hierarchy harmonisation

* Commission urges Council to speed up proposal adoption

* Council to clarify status of existing and future legislation

By Alice Gledhill

LONDON, March 17 (IFR) - There could be a light at the end of the tunnel for European lenders waiting to issue billions in loss-absorbing debt as rulemakers ramp up the pressure to accelerate the requisite legislation.

The European Commission endorsed a new form of senior unsecured debt in November 2016 in an attempt to harmonise the increasingly fragmented European bank debt market, the result of diverging national approaches to meeting post-crisis regulation.

At the time, it provisionally indicated a June 2017 deadline for the amendments to the Bank Recovery and Resolution Directive (BRRD), though whether such a deadline was feasible immediately met with broad scepticism.

However, in a working paper from earlier this month seen by IFR, the Commission underlined the need to expedite the adoption of its proposal tackling the harmonisation of the bank creditor hierarchy.

It warned that failure by the European Council to fast-track the adoption of the proposal could prompt member states to adopt their own national rules on creditor hierarchy.

“This means that banks would issue subordinated instruments under different legal regimes to cover TLAC/MREL shortfalls,” it wrote in the paper.

“This would create market uncertainty and no clear view on ranking in creditor hierarchy for investors, especially in the case of cross-border issuing institutions.”

Signs have already started to emerge that banks are getting around the lack of legislation by coming up with idiosyncratic solutions.

Santander, for example, inserted a contractual clause into a new issue priced in January giving it a “second ranking senior” status, allowing it to chip away at one of the largest issuance targets of any bank in Europe.


But for many other lenders, the lack of legislation permitting the issuance of loss-absorbing senior debt in many major European jurisdictions has thwarted issuance.

This is a severe handicap as they square up to a new standard known as minimum requirement for own funds and eligible liabilities.

In the paper published earlier this month, the Commission recommended that the Council Working Party should aim at a general approach for May 2017.

According to a market source, the Maltese presidency of the Council has prepared a new version of the relevant BRRD article containing certain concessions should that May deadline not been met.

Such concessions would come as a relief to lenders who until now have been constrained by the bureaucratic tussles in Brussels.


The new version includes an additional clause allowing for member states “to proceed with an ‘anticipated transposition’ of the Directive and start accumulating the necessary buffers as well as signal to markets the necessary legal certainty.”

It proposes that “Member States may, after 31 December 2016 and before the date of application of this Directive, adapt their national laws governing the ranking in normal insolvency proceedings of debt instruments issued after the date of application of such laws only in order to comply with the conditions laid down in this Directive.”

Its introductory statement said issuance should start as soon as possible due to possible limitations in the capacity of the market to absorb new eligible debt, the source added.

A Council spokesman confirmed that the presidency has drafted some proposals to clarify the status of existing legislation or legislation to be adopted, on which member states have been invited to comment.

“The issue of transposition is one of the issues being discussed, in a situation where a number of member states have amended or are in the process of amending the insolvency ranking of unsecured senior debt under their national insolvency laws to allow their banking institutions to comply with the subordination requirement,” he said. (Reporting by Alice Gledhill, Additional reporting by Helene Durand, editing by Julian Baker)

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