MREL & TLAC A Market Perspective WORLD BANK CONFERENCE, VIENNA 12/13 DECEMBER 2016 FINSAC WORKSHOP ON BAIL-IN AND MREL

Transcription

1 MREL & TLAC A Market Perspective WORLD BANK CONFERENCE, VIENNA 1/1 DECEMBER 16 FINSAC WORKSHOP ON BAIL-IN AND MREL

2 Resolution Framework Key Success Factors from a Market Perspective A successful resolution framework would improve market and investor confidence Resolution Framework Key Success Factors Business model neutral Resolution strategy to avoid substantial changes in business model bearing high execution risk Minimum level of standardization Resolution framework not necessary same for all jurisdictions, but minimum harmonization Clarity to market participants Large volumes of issuance needs to meet capital requirements necessitate clarity for investors

3 MREL & TLAC Key Features MREL TLAC Scope Eligible Instruments Sizing Implementation Date All credit institutions and investment firms in EU Equity Junior debt Senior debt Unsecured liabilities (>1 year) Senior unsubordinated debt (>1 year) may be excluded if <9% of total liabilities in same rank No common minimum standard Resolution Authority to annually determine MREL on a bank-by-bankbasis Adjustments may be applied based on risk profile, resolution strategy, etc. 16 with years phase-in period G-SIBs Equity Junior debt Senior subordinated debt Partial recognition of senior unsubordinated debt Absorb losses prior to liabilities excluded from TLAC Common Pillar 1 standard minimum plus Pillar case-by-case requirements TLAC minimum requirements do not include capital buffers FSB proposes lag before implementation (not before Jan 19) Source: FSB, UniCredit Research, Directive 1/59/EU

4 MREL & TLAC Considerations for Stakeholders Investors Banks Stronger focus on fundamentals Increased cost of funding Uncertain investor appetite Increased debt issuance Potential demand for higher spreads Additional management buffer MREL / TLAC Impact Rating actions Reduced likelihood of crisis Change in sovereign support assumptions Change in credit rating methodologies Reduced costs of crisis Mitigating increase of sovereign yields Rating Agencies Sovereigns Source: FSB Impact Study 15, BBVA Research, BlackRock Solutions Analysis

5 FSB TLAC Impact Assessment Study 1 External TLAC shortfalls to 79bn Increase in spreads + bps Costs of meeting the shortfall to 5m per year Macro-economic benefits bps annual GDP 5 Reduced cost of crisis.8 % Source: FSB, TLAC Impact Assessment Study (November 15) 5

6 TLAC Impact on Pricing of Senior Unsecured Debt Relative OpCo vs. HoldCo spread differential increased by about -bp Sep-1 Oct-1 Nov-1 Dec-1 Jan-1 Feb-1 Mar-15 Sep-1 Oct-1 Nov-1 Dec-1 Jan-1 Feb-1 Mar-15 Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Basis Points RBS HoldCo vs. OpCo Spread (Senior Unsecured) HSBC Credit Suisse Barclays 1 UBS Source: Bloomberg and J.P Morgan estimates. Prices based on COB 11 January 16 6

7 MREL & TLAC Expected Shortfalls Reflected in Recent Market Studies TLAC (1) Recent studies indicate that US G-SIBs could have a shortfall of c. $16bn of TLAC $6bn capital shortfall $1bn long term debt shortfall European banks to comply with local regulator requirements in addition to TLAC TLAC shortfall at 18% of RWA is estimated at c. 5bn MREL () Pillar 1 requirements scenario Additional LAC of bn Pillar 1 + Pillar + buffers scenario Additional LAC of 59bn Higher of x capital requirements or 8% of TLOF scenario Additional LAC of 79bn Sources: 1) Bloomberg, SNL, Company Filings as of June 15, debt outstanding as of February 15, UBS Analysis, Goldman Sachs Analysis November 16, Barclays Analysis April 16; ) EBA QIS data (June 15) 7

8 US Banks Capital Structure & TLAC Shortfalls Reflected in Recent Market Studies Recent studies indicate US G-SIBs could have c. $16bn of TLAC shortfall, c. $6bn of which is capital shortfall and c. $1bn of which is due to Long Term Debt (LTD) shortfall CET 1 Capital Shortfall LTD Shortfall AT1 T Additional TLAC Qualifying 19 LTD Shortfall $ BN JPM BAC C WFC GS MS BK STT Source: Bloomberg, SNL, Company Filings as of June 15, debt outstanding as of February 15, UBS Analysis, Goldman Sachs Analysis November 16 8

9 European Banks Capital Structure & TLAC Shortfalls Reflected in Recent Market Studies In addition to the TLAC requirements, some European banks will have to comply with the local regulator requirements TLAC shortfalls at 18% of RWAS indicated to be at c. 5bn BN HSBC BNP 1 11 BARC SAN CA DB RBS BPCE UNI CET 1 AT BBVA T Additional TLAC Qualifying Debt SG 18 STAN CS 19 LTD Shortfall LTD Shortfall UBS 7 NDA Source: Bloomberg, SNL, Company Filings as of June 15, debt outstanding as of October 15,UBS Analysis, Barclays Analysis April 16 9

10 EBA Quantitative Analysis European Banks Potential MREL Shortfalls Pillar 1 requirements scenario: Additional LAC of bn Pillar 1 plus Pillar plus buffers scenario: Additional LAC of 59bn Higher of x capital req. or 8% TLOF scenario: Additional LAC of 79 bn BN P1 only LA Buffer Buffer / 8 % Source: EBA QIS data (June 15) G-SIBs OSIIs Other 1

11 UK & Nordic Banks MREL Requirements and Shortfalls Reflected in Recent Market Studies MREL requirements and shortfalls appear manageable. MREL shortfall is approximately $118bn for the UK banks under consideration and approximately $1bn for Nordea Bank MREL Estimate in $ BN BACR HSBC LLOYDS RBS STANLN Nordea Shortfall Source: Company filings, Bloomberg, Bond Radar, Goldman Sachs Global Investment Research, Exchange rates as of Aug 5, 16 11

12 MREL & TLAC Concluding Remarks 1 Legal certainty and transparency MREL and TLAC convergence Consistent with resolution strategy Conceptual and technical consistency 5 Implementation of MREL in other jurisdiction (US/UK/CH) 1