IFR’S 16TH ANNUAL FIG capital conference was a roaring success. It was standing room only; we had to rig up live video relay outside the conference room to accommodate anyone who didn’t want to squeeze around the edges of our auditorium.
The event has always been well attended and while I’ve been delighted that delegates want to sit through seven hours of IFR-anchored discussion about a highly technical and jargon-ridden part of the market (albeit highly informed and very insightful discussion), I’ve always at the same time been slightly bemused. After all these years, I think I may finally have figured out why that is.
It’s partly because the four horsemen of today’s banking [non]-apocalypse – capital, liquidity, leverage and resolution, bound together by the yoke of transnational policy – are just so fundamental to everything that banks do, because as a package they define what banks have to be in the modern era. It’s pretty existential stuff.
It’s also partly because of the fear factor that such abstruse terminology engenders in a largely generalist marketplace. The total capital debate is need-to-know stuff.
It’s partly because people want to gauge the level of knowledge of others in order to assuage any anxieties they may harbour about their own. That’s the power of networking.
It’s partly – and here’s the thing I wanted to focus on – because people want answers.
Keeping tabs on the capital debate is like trying to follow the plot of a foreign-language movie where you get the semiotics but not the words.
UNLESS YOU’RE dedicated to the cause, following the debate is nigh-on impossible. So many agencies – domestic, regional, global – so many jurisdictions, so many rules, so many consultations, so much direction of travel, so much partial clarity (read: partial darkness). It’s an almost impenetrable maze.
Keeping tabs on the capital debate is like trying to follow the plot of a foreign-language movie where you get the semiotics but not the words.
The blurring of the differentiation between capital and funding that senior subordination and bail-in have forced on us; the rules around where TLAC-eligible debt has to be held through the group; what the rules are when it comes to elements such as, say, the establishment of a US intermediate holding company or ring-fencing in the UK; the HoldCo/OpCo issue; Solvency II and HLA for insurers; hoped-for convergence between TLAC and MREL in Europe; the jurisdiction-by-jurisdiction drip-feed solutions in a supposedly united EU (the Dutch parliament just approved contractual bail-in on November 10); it’s all out there.
We covered it all, just as IFR’s crack team of reporters and editors cover the issues day by day – IFR’s FIG briefing, incidentally, is a must-read. But back to my point about answers. Stop press: there are no answers; well, no final answers anyway.
This process is both a moving and a moveable feast. We’d put together the capital conference with TLAC front and centre. My pre-conception going into it had been to tell delegates what the FSB blueprint is going to mean in terms of capital raising; what it’s going to mean for senior unsecured pricing; how the capital and funding stack are going to play out in terms of investor receptivity and pricing differentials; how the jigsaw puzzle fits together.
BUT THAT’S not how the discussions unfolded. From a practical planning perspective for banks, TLAC is meaningless. It’s a standard. As foreshadowed by my colleague Helene Durand in a great piece a week before the conference (TLAC: It’s all in the implementation), banks will have to follow the specific interpretations as laid out by their own regulators.
That means piecemeal solutions; an uneven playing field; that whatever TLAC-eligible securities are issued by banks in different jurisdictions can’t be mapped in a simple look-across. Investors will have to engage in some convoluted comparative jurisdictional analysis. Beyond the credit issues, how, for example, for similarly-rated issuers do you map a HoldCo security from Bank A in jurisdiction 1 to an OpCo security from Bank B in jurisdiction 2 from a pricing and risk perspective where corporate structures in jurisdiction 2 don’t allow for HoldCo structures and the resolution frameworks differ?
The UK is solving for BLAC; Germany for GLAC; Italy for ILAC; France for FLAC (in the case of France we don’t know what FLAC is because French policymakers haven’t declared yet). But you get the picture.
There were calls for transparency through the sessions yesterday. But what if you get transparency, but all it tells you is that nothing fits together? There were also calls for the European Union to push the cause of harmonisation and create a region-wide ELAC. Phew!
In the meantime, life goes on at the sharp end of primary issuance in the capital markets. For banks in countries that haven’t declared their TLAC flavour, the notion of front-running your policy-makers and structuring securities with certain features and triggers and trying to get a market price is not necessarily the smart thing to do. The risk is you either upset your regulator or you end up with a line of orphaned debt. Or probably both.
Expectations for AT1 issuance by European banks in 2016 range from mid-€30bn to €40bn; slightly lower for Tier 2, while we should see €15bn–€20bn of insurance hybrids. Finding clearing prices will be more the archetypal art rather than science – but when has that not been the case? And the capital markets are nothing if not resourceful. Our 17th annual bank capital conference is already in the planning stage and we’re taking the show on the road during 2016. Watch this space.
