July 16, 2015 / 4:41 PM / 4 years ago

Mismatching insolvency laws spell trouble for resolution

* More countries move to transpose resolution directive

* National discrepancies to compromise level playing field

By Alice Gledhill

LONDON, July 16 (IFR) - The capacity for countries to tailor national insolvency laws as they implement new bail-in legislation could store up serious problems for future bank resolution and distort the playing field for bank issuers, market participants have warned.

Germany and Spain have been among the first countries taking steps in transposing the EU’s Bank Recovery and Resolution Directive (BRRD) into their national frameworks.

However, both countries had to tweak local insolvency laws, creating disparities that bankers and investors fear could yet further complicate the regulatory playing field.

“Absence of alignment among national insolvency laws could complicate cross-border resolution and create a competitive disadvantage between countries in terms of funding and potential capital shortfalls,” said Sebastien Domanico, global head of DCM financial institutions origination at Societe Generale.

Germany took many in the market by surprise in March when it proposed the statutory subordination of senior unsecured bonds to other senior liabilities.

The proposal was lauded by many for providing clarity and legal certainty in insolvency and also because it could help meet safety buffers such as TLAC (total loss absorbing capacity), proposed by the Financial Stability Board.

However, it is not without its problems. The lawmaking process has seen criticisms emerge within the Bundestag that alleges that certain subsections favour investment banks over SMEs and individuals.

While most believe that the law will go through, the objections show how thorny implementing bail-in can be.

“As they want the entire approach ‘re-thought’ along the lines proposed by them without making a specific proposal, the issue could drag well beyond the summer pause,” said one German lawyer.

Another key objection - echoed by much of the investor community - is that the law would be applied retroactively.

“It’s quite disappointing to see an instrument that was sold to investors as pari passu with other senior instruments, retrospectively bumped into the subordinated category,” said Robert Kendrick, credit analyst at Schroders.


Other countries are watching the German proposals’ progress with great interest.

The Netherlands, for example, is reviewing it, but there is no consensus on the potential implementation of similar legislation, according to Romke van der Weerdt, head of capital advisory at ING.

“Although there are clear benefits to the German proposal, some concerns still exist, mainly with regards to the perceived reduced attractiveness of senior debt financing for banks due to the subordinated status of the bonds, the potentially unequal impact on the Dutch banks, and the absence of clarity on TLAC requirements,” he said.

Sam Theodore, a managing director at Scope Ratings, agreed: “It’s not very helpful for Germany to have a different set of bail-in rules. Issuing senior unsecured debt with statuary subordination, alongside banks that don’t, could create competitive problems.”


Meanwhile, Spain’s transposition of the BRRD has thrown yet another curve ball into the market. While Germany has opted for statutory subordination, Spain has plumped for a contractual approach, changing the ranking of claims to enable Spanish banks to issue so-called “senior subordinated notes” or “Tier 3”.

“From an investor’s point of view, the Spanish system seems much fairer as the impact on the existing instrument is much more negative in Germany than in Spain,” said Schroders’ Kendrick. “The end result may be similar but the impact on existing senior instruments is potentially very different.”

But whether this could help Spanish banks tackle their TLAC targets is a point of contention within the market, largely because the language of legacy Tier 2 debt could preclude another layer of instruments between Tier 2 and senior.

As a result, Christy Hajiloizou, analyst in credit research at Barclays, said she believed that jurisdictions such as France are considering what Germany is doing.

Certain Spanish issuers are said to be more concerned than others. “ depends on the contractual wording of that Tier 2 documentation. People are not in a hurry and will wait for the TLAC termsheet,” said Salvador Ruiz Bachs, a partner at Allen & Overy in Spain.

The FSB is expected to publish an updated termsheet in November. (Reporting by Alice Gledhill, editing by Helene Durand and Luzette Strauss)

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