LONDON, Oct 5 (IFR) - The European Central Bank will apply
greater restrictions and risk control measures to senior
unsecured bonds pledged as collateral from January 2017 in
response to new rules that force losses onto the asset class in
the event of a crisis.
The ECB said on Wednesday that it will reduce the usage
limit for uncovered bank bonds (UBBs) from 5% to 2.5% from the
start of 2017. The limit will not apply to assets that are worth
less than 50m after haircuts are applied or to assets
guaranteed by public sector entities that can levy taxes.
Around 116bn of UBBs (after valuation and haircut) were
pledged as collateral in Q2 2016, according to ECB data.
The central bank has also amended its eligibility criteria
to allow senior unsecured debt that is statutorily subordinated
(as is the case in Germany) to be pledged as collateral, which
was not permitted under existing rules.
The changes were "triggered by the implementation of the EU
Bank Recovery and Resolution Directive (BRRD) in EU Member
States and the forthcoming minimum requirements for own funds
and eligible liabilities (MREL), as well as by the need for
global systemically important banks (G-SIBs) to adhere to the
new total loss-absorbing capacity (TLAC) framework", the ECB
said in a statement.
Unsecured bank bonds have traditionally been an important
funding tool, but new regulation to shift the cost of failing
banks from taxpayers to creditors has placed the asset class in
the firing line to absorb future losses.
Countries across Europe have started to take steps to
subordinate senior unsecured debt to meet the new rules.
Germany, for example, pushed through a law that subordinates
all outstanding senior unsecured bonds to other senior
liabilities, while France is introducing a new layer of debt
known as non-preferred senior.
The European Commission has started to explore the
possibility of harmonising this divergence in local regimes on
the grounds that it creates competitive distortions and
complicates the bail-in tool.
That means further changes to collateral eligibility rules
could be afoot.
"The ECB reaffirms its support in reaching agreement on a
common EU approach to the creditor hierarchy in bank insolvency
and resolution, and notes that work is ongoing in this respect,"
"The ECB will review this decision during the course of
2017, and the collateral eligibility framework eventually
applicable to UBBs will also reflect progress made within that
period towards a common EU approach."
(Reporting by Alice Gledhill; Editing by Philip Wright, Julian