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.
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.
With respect to resolution planning, the statement notes that:
Ultimately, however, the statement largely passes the problem back to resolution authorities, rather than providing any clear and decisive solutions.