The Association for Financial Markets in Europe has urged European lawmakers to quickly agree and transpose a European Commission proposal implementing TLAC into Europe to give banks enough time to build their cushions of loss-absorbing debt.
In a letter dated February 20, AFME called for the European Commission and Parliament to reach an agreement on the proposal as a matter of urgency.
The Commission said in a November 2016 legislative proposal that non-preferred debt would be the most cost-effective way for banks to comply with the subordination requirements of global loss-absorbing standards.
However, the European legislative process is notoriously slow, which could leave banks with very little time to meet the 2019 deadline for the implementation of the global loss-absorbing capital requirements.
“It is important to note that there is not yet a well-developed market for explicitly loss-absorbing bank debt in Europe,” said AFME, “and it is important for the legislation to support the development of a deep and liquid market in these instruments.”
“Agreement on a common creditor hierarchy as soon as possible is therefore required to facilitate this.”
The EC’s proposal, which is part of a broader legislative package and is pencilled in to be transposed in June 2017, is attempting to harmonise what is becoming a multi-track and multi-speed senior unsecured market in Europe.
French banks, for example, have been able to power ahead with issuance of senior non-preferred since the legal framework allowing that type of issuance was enacted at the end of 2016.
However, other jurisdictions are lagging. Dutch and Spanish banks for instance are still waiting for the legislative framework enabling this new style of senior debt.
For those keen to hit the market now, there are ways to get around the legislative inertia. Santander circumvented the lack of legal framework by inserting a contractual clause in a €1.5bn five-year that gives bonds a “second ranking senior” status.
This allowed the trade to comply with the EC proposals. The contractual features will fall away once the legislative framework is implemented.
Others such as ING, Allied Irish Banks and Bank of Ireland have opted for the holding company route to begin meeting the requirements.
G-SIBs have until 1 January 2019 to comply with their TLAC requirements, and AFME said any “delay and lack of clarity for banks and investors could create significant market capacity concerns due to significant issuance in a compressed period of time”.
The letter was addressed to EC vice-president Valdis Dombrovskis and the chair of the Parliament’s economic and monetary affairs committee.