By Gilles Renaudiere, Director, Capital Products, BNP Paribas.
Gilles, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I am a senior structurer within BNP Paribas’s Capital Products team, a position I have held for the last 4 years. Prior to that, I worked for UBS in their Debt Capital Markets department covering financial institutions, where I gained very valuable experience in the functioning of the bond markets, incuding at times of stress like in 2008 at the time of the Lehman collapse. These days, i am more focussed on staying up to speed with the ever-changing banking legislation, and how it affects regulatory capital and loss absorbing capacity. I act as an adviser to banks in Europe and across the world on how to structure their MREL/TLAC or hybrid instruments so that they meet regulatory requirements in a way that can be marketed to fixed income investors. One of my most important recent projects has of course been the senior non preferred issuance programme for BNP Paribas, which is a project which really started at the end of 2014 when the TLAC draft term-sheet was first published by the FSB. It was more than 2 years later, in January 2017 that BNP issued the first transaction, so patience is a pre-requisite in our world! More broadly, my job is also to take a step back, away from the nitty gritty of bond issue documentation, and assist banks in navigating the regulatory changes and formulating their capital and issuance policy.
What are some of the key concerns surrounding TLAC and MREL?
The TLAC/MREL concept is the key ingredient of a fundamental policy pledge formulated after the financial crisis: from now on, no bank should ever be bailed-out by taxpayer’s money. All the new banking regulations emanate from a commitment to this new paradigm. The issuance of MREL/TLAC debt, which can be bailed-in and therefore recapitalise a failing institution without the help of public money, is therefore critical to make good on the promise made by politicians. But it is untested! Nobody knows yet for sure whether bail-in will be truly effective in imposing losses on the private sector, restoring solvency of a failing institution and avoiding contagion or market panic. So, at the moment we are embarking on a gigantic experiment, asking banks to issue hundreds of billions of a new form of debt, and time only will tell whether this has made the system safer. The concern however is that we don’t know whether the fixed income markets can continue to absorb this supply of new bail-inable debt, especially at times of higher volatility. So, we need to continue to work with regulators and market participants to find the right balance between financial stability and market discipline.
At the Risk EMEA 2018 Summit, you will be speaking on your insight regarding ‘Integrating TLAC and MREL into capital and funding plan’. Why is this a key concern right now? And what are the essential things to remember?
Given the large amounts of MREL/TLAC debt that will likely be required, it seems clear that this new form of debt will actually represent a significant part of banks’ funding going forward. The challenge however is that regulation is still not entirely clear on the calibration, form and timing of the requirements. And without clarity on these 3 points, it is very difficult to formulate funding and issuance plans. The question on what to do with smaller banks, traditionally funded mostly by deposits and with limited need for wholesale funding is also unresolved. Will those banks really be required to raise expensive MREL debt in the markets, even if they do not need the funding? In terms of things to remember, our advise to banks has always been that the best approach is to try and proceed on a linear manner. In other words, even if final requirements are uncertain, the prudent approach is probably to start issuing now, but doing so on a gradual basis, to make use of transition periods and avoid incurring too high cost of carry upfront.
What are some of the main challenges when harmonizing directives across Europe?
The European Union legislative process to that in most other Basel jurisdictions, with 2 main issues. First, you have to reconcile the views of 28-member states, with sometimes very different banking sectors! There is a single rulebook in the EU but given the need to respect the sensitivities of everyone, regulations tend to reflect very finely balanced compromises, and thus can be quite complex to understand or put in practice. Second, because the EU process is quite slow, member states often start doing their own separate legislation before doing so EU level, which makes harmonisation even more difficult. Concretely for MREL, the harmonisation challenge will be to ensure a level playing field in MREL/TLAC requirements, between those countries which favour holdco/opco models, Germany and its statutory juniorisation, and those with depositor preference. It will take time, but i believe that eventually the level playing field will be achieved, even if we are far from it now!
Why is appetite for investors a key talking point for 2018?
Investor appetite for MREL/TLAC debt is a key point for this year for several reasons. First, the asset class is expected to grow significantly as many countries are about to pass legislation to allow for the issuance of senior non-preferred, including Holland, the Nordics and Austria. Second, the already well-established issuers, such as the GSIBs who have already been issuing for the last couple of years significant amounts of TLAC debt will need to demonstrate that investors still have lines and capacity to absorb tens of billions of incremental TLAC debt on an annual basis. Finally, all this will need to happen in a context of rising rates and increased volatility, so how investors will react to these new market conditions will be critical to successful continued issuance of TLAC/MREL products.
How do you see the risk landscape evolving over the next 6-12 months?
Over the next 6-12 months, I expect that the main policy arbitrages on MREL calibration will have been settled at the European level, which will give much needed clarity on banks’ issuance requirements. I expect we will see a lot more new issuers coming to market, which will contribute to diversify the asset class. And I expect to see established issuers continuing to do diversify on their own, by tapping new markets across the globe as they continue to look for new investors.
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