Share with your friends
tree sunlight rays mountains

Retail holdings of bank debt

Retail holdings of bank debt

The European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) have issued a statement (PDF 383 KB) on the treatment of retail holdings of bank debt subject to bail in under the Bank Recovery and Resolution Directive (BRRD). The statement only covers bank debt, not retail holdings of bank equity.

The problem here is clear from the data presented in the statement. As of Q3 2017, retail investors of the euro area held EUR 262.4 billion (12.7 percent) of the EU bank debt securities issued to euro area investors. Of this retail held debt, 81 percent was senior unsecured debt and 19 percent subordinated debt.

A high concentration of retail held bank debt is evident in some countries, in particular Italy (EUR 132.3 billion, equivalent to 37 percent of total bank issued debt), Austria (36 percent) and Germany (12 percent).

The BRRD introduces strict burden-sharing requirements for shareholders and creditors before public funds could be used in a bank failure, and requirements for systemically important banks to hold a minimum amount of bail-inable loss absorbing capacity. It is therefore important that any retail investors in bank debt understand the risks inherent in their investments. There is evidence that, in some cases, investors have been proactively approached by banks to invest in bank debt on the (incorrect) basis that the recommended product was as safe as a deposit or was protected by a deposit guarantee scheme.

Conduct requirements

With respect to conduct supervisors, the statement notes that, under MiFID 2, banks must provide existing retail clients who already hold bail-inable bank debt with complete and updated information on the potential treatment of such investments in resolution or insolvency.

MiFID 2 also strengthens investor protection for new sales of investments. Of particular relevance to bail-inable debt are the requirements relating to product governance (target market, scenario analysis), the sale of complex debt instruments, and the assessment of suitability. However, the statement does not go any further than this, for example to consider banning the sale of such products to retail investors.

Resolution authorities

With respect to resolution planning, the statement notes that:

  • Where resolution authorities establish that there is a material presence of retail investors as holders of the debt of a bank potentially subject to resolution, they should take account of this in their resolution planning.
  • The presence of retail holders of bank debt could pose an impediment to the resolvability of a bank. In some cases this might justify an exemption from bail-in under Article 44(3) of the BRRD. A bank might then be required to issue additional bail-inable debt to non-retail investors.
  • However, the presence of a large stock of retail holders does not in itself constitute an impediment to resolvability and does not in itself justify an exemption. Indeed, the routine application of an exemption would create a moral hazard and could encourage retail investors to invest in higher yield products on the assumption that they will be protected from the risk of bail-in should a bank fail.
  • Resolution authorities are therefore encouraged to consider alternative ways of dealing with a high legacy stock of retail owned bank debt, including additional issues of subordinated debt (where retail holdings are primarily of unsubordinated debt) and issues of high denomination debt instruments.

Ultimately, however, the statement largely passes the problem back to resolution authorities, rather than providing any clear and decisive solutions.

Connect with us

Related content