The changes are far from trivial; involving legal structure changes in some cases as banks grapple with HoldCo/OpCo issues and try to engage in single versus multiple point-of-entry optimisation for bail-in, and home-country regulators try to get their heads around the embedded complexities of cross-border issues arising from the international nature of banking, which is leading to discussions around subsidiarisation, trapped capital, downstreaming, internal TLAC and group capital management.
There will be no end-point to this issue. Basel III issues may be relatively clear as is its implementation schedule. But Basel III is fast giving way to Basel IV notions of higher leverage ratios, use of standardised rather than internal models, higher RWA stacks, greater disclosure … and … more capital. The ratings agencies are also fine-tuning their methodologies around capital and resolution, so banks also have to solve for ratings issues.
In this complex and evolving world, banks also have to deal with business as usual and issue senior debt and capital to suit market conditions and needs today. This, also, is no trivial matter: valuing the various capital and funding buckets in an in-process regulatory change environment AND against a hard-to-read, abnormal and artificial monetary backdrop fronted by ongoing QE in Europe and Japan, and the ‘will-they-won’t-they’ or perhaps more to the point ‘when-will-they’ rate rise conundrum in the US is no easy feat. Particularly as markets succumbed to bouts of severe volatility and uncertainty in the second quarter of 2015.
Panellists at IFR’s Bank Capital Roundtable – hailing from the investor and issuer communities as well as underwriters and structurers at investment banks and ratings professionals – were broadly speaking positive about the direction of travel where TLAC/MREL convergence is assumed and the broad canvas is taking colour.
At the end of the day, market professionals need to be pragmatic. With clarity around the CRD IV environment only really being clear since the middle of 2014, for example, banks that are bound by it had been focused on actively reshaping their capital structures to that at the AT1 level, at the level of total capital (notwithstanding the lack of Tier 2 issuance at the time of the discussion had come as something of a surprise), and at the level of senior debt, where banks need to provide sufficient comfort to senior creditors that there is sufficient loss-absorbing capital to protect them in a bail-in scenario.
Over the course of 2015, the capital and resolution debate has become pretty constructive and certainly more detailed as uncertainties (including around taxation issues), different interpretations as well as ambiguities start to dissipate.
Next stop? IFR’s Bank Capital Conference in November 2015, shortly after the G20 meetings at which TLAC will be a key agenda item.
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