October 15, 2018 / 8:30 AM / 9 months ago

EU says banks have big buffer shortfall as market conditions worsen

BRUSSELS (Reuters) - Euro zone banks have a large shortfall in their loss-absorbing buffers and now face tougher market conditions for building them up due to higher volatility and widening spreads in sovereign yields, the bloc’s banking watchdogs said on Monday.

Under international and EU banking rules, large banks must issue special loss-absorbing debt known as TLAC and MREL that can be converted into capital if a crisis burns through their core capital buffer.

“Not enough progress has been made there,” the European Banking Authority’s chair Andrea Enria told a banking conference in Brussels. Enria said the problem concerned large and medium banks but not the biggest systemically important lenders, like Deutsche Bank or Unicredit, who are instead “very close to being fully complaint.”

The shortfall stands at 125 billion euros ($145 billion) for the bloc’s 35 most complex banking groups, said Dominique Laboureix, who is a member of the Single Resolution Board, the EU body that handles failing banks and sets the level of loss-absorbing buffers.

These buffers are for use when a bank is in trouble. They are seen as crucial to allow an orderly wind-down of a lender, and should also reduce the cost to taxpayers of any banking rescue.

Enria said investors have so far shown interest in buying this debt but warned that the “window of opportunity is closing down”.

“Funding markets are not going to be as open and available as they were until now,” Enria said, citing increased volatility, external events, widening sovereign spreads and concerns on emerging markets as the main reasons for investors’ lower appetite.


A sufficient level of loss-absorbing buffers is required for banks to be able to access funding from the bloc’s fund for troubled lenders, the Single Resolution Fund (SRF).

The SRF is expected to hold nearly 33 billion euros ($38 billion) in 2019, up from almost 25 billion this year, Single Resolution Board chair Elke Koenig said on Monday.

The board manages the fund, which is financed by euro zone banks.

The plan is to gradually increase the fund’s holdings to at least 1 percent of all covered deposits in euro zone banks by the end of 2023, which is estimated to be between 55 billion and 60 billion euros.

The fund will then have a backstop to face major banking crises although the final details are yet to be finalised by euro zone states.

EU leaders agreed in June to give the state rescue fund, the European Stability Mechanism, more powers to help the banking fund, but its precise powers are expected to be clarified in December.

($1 = 0.8629 euros)

Reporting by Francesco Guarascio

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