2010 was the year concerns about the health of European sovereigns eclipsed the banking crisis. For the first time since the credit crunch of 2007, financial institutions were no longer the sole target of public opprobrium, and concern about defaults centred on entire countries. Bailouts were no longer an enforced favour from taxpayers to their national banking systems but had become instead an international rescue mission mounted to prevent the EU bloc from foundering on its own economic contradictions.
Yet while the financial crisis may have found a new epicentre, the aftershocks were felt everywhere, and nowhere more so than in financial institutions. Banks, especially those that had been in receipt of state aid, were viewed as highly correlated with their sovereigns as market participants and commentators waited for the next institutional failure that would turn investment bankers into de facto civil servants. High quality banks from the most troubled regions found themselves the victims of regional tiering by investors. Many institutions further down for credit curve found that they had no access to the market, even, in some cases, in government-guaranteed format.
As the bid for quality assets increased in response to the general turbulence, covered bonds became the format of choice for many issuers able to access that market. For much of the year, the senior sector suffered prolonged periods of shutdown – including one of almost two months. These coincided with the worst episodes of the sovereign crisis as well-funded top-tier issuers refused to validate widening secondary levels with new issues. While they kept their powder dry, less well-regarded issuers dependent on the best banks’ willingness to reopen the sector found themselves locked out of the funding market. For every Rabobank (profiled in this supplement) able to fund through the cycle, there were many more that could not.
On the capital side, the market has done its best to innovate in the face of a murky regulatory picture. The experience of the contingent capital sector is an example: two issues have emerged so far, each of them carrying both merits and disadvantages for fixed income investors. Those issues are both valuable for providing a context in which the discussion about that market’s future can proceed. But as this supplement went to press its future was in doubt following the latest communication from the Basel Committee, which explicitly excluded contingent capital instruments from the regulatory buffer in which many had hoped they would appear.
There have been some successes on the regulatory side. The Committee’s proposal on burden-sharing in particular has been praised for its even-handed approach to ensuring that investors in capital instruments are not the unintended beneficiaries of future state assistance for banks. But the Committee’s habit of issuing piecemeal and incomplete updates on the new regime can hamper bank treasuries keen to comply as soon as possible with the new capital requirements. As one banker notes in these pages, there is no rule book as yet but the market sorely needs one.