BRUSSELS, Sept 29 (Reuters) - Banks in the European Union face large capital gaps if the bloc and Britain do not agree on how to treat their loss-absorbing debt after Brexit, the head of the EU banking watchdog said on Friday.
Under new banking rules meant to reduce taxpayers’ costs in banking crisis, EU lenders are required to issue a sufficient amount of debt that would be written down, or bailed-in, to absorb losses if they fail.
The European Banking Authority estimated that 276 billion euros ($326 billion) of debt will have to be issued by banks in the EU to meet the regulatory targets, warning that markets may find it difficult to absorb it.
Brexit may make things more complicated.
Most banks in the EU have issued loss-absorbing capital under British law, which could make it not compliant with EU rules on bank rescues in the event of a hard Brexit, Andrea Enria told a banking conference in Brussels.
“What will happen to these instruments if the UK becomes a third country? Banks need to start thinking about that and authorities need to prepare,” Enria said.
Regulators face this problem for all bank debt issued under foreign jurisdictions that, in the absence of mutual recognition agreements, may not allow it to be wiped out to rescue a bank.
With Brexit the headache would be exponentially bigger because most EU banks’ debt is currently issued under British law.
Part of this debt, known as MREL, is short-term and will be paid back before Britain leaves the bloc in 2019, but the longer-term liabilities are likely to remain pending after Brexit, Enria told Reuters on the sidelines of the conference.
Without a deal on how to treat them, banks may not be able to use them to absorb losses and would in turn be obliged to issue new MREL debt.
Enria said that contractual clauses may need to be inserted into debt contracts to address this uncertainty. “Or banks should rather issue (debt) under different law,” he said.
$1 = 0.8461 euros Reporting by Francesco Guarascio @fraguarascio; Editing by Gareth Jones