Reuters: Bankruptcy News: Bankers dare to hope as non-viability gets airing

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Bankers dare to hope as non-viability gets airing Jun 8th 2012, 16:20 Fri Jun 8, 2012 12:20pm EDT * Draft Directive includes high level of detail on non-viability * Tier 2 issuance should be compliant with new regulations By Helene Durand LONDON, June 8 (IFR) - Bankers are hopeful that subordinated bank debt issuance could restart as Europe finally got its long-awaited bank resolution regime and more clarity on the concept of non-viability. The release by the European Commission of the Crisis Management Directive this week could finally give regulators and issuers comfort to go ahead with new issues, at least with Tier 2 transactions. European bank capital issuance hit EUR70bn in 2006 but has dwindled to virtually nothing since regulators started rewriting the rules in 2010 as they sought to improve bank hybrid debt's ability to absorb losses. Borrowers have been reluctant to go to market as they are uncertain over what features - such as non-viability language - new deals need and concerns around whether new transactions will count as regulatory capital going forward. According to a release by the Basel Committee for Banking Supervision published in January 2011, capital instruments need to fully absorb losses at the point of non-viability. This requirement can be met through a statutory regime as long as it produces the same outcome as a contractual approach. "Issuers can now go to regulators and say that point of non-viability will be in the statutes from 2015 and anything issued now will be captured and regulators therefore don't need to impose contractual clauses," said Khalid Krim, head of capital solutions at Morgan Stanley. "I would argue that banks can now issue Tier 2 that is compliant with new regulations." The amount of detail in the EC's draft Directive that covers the concept of non-viability indicates that this is where the key definition will lie, instead of in CRD4, which addresses other requirements for bank capital instruments. "We might get to the point where there is nothing preventing regulators from saying to banks that they can issue Tier 2 today and Additional Tier 1 once the EBA technical standards are finalised," said AJ Davidson, head of hybrid capital structuring at RBS He added that for Tier 2, there was nothing in the draft version of the Capital Requirement Regulation that required banks to include non-viability language. "If this holds, it will be harder for regulators to tell banks that deals issued today would not qualify as eligible own funds and not be subject to grandfathering under the CRR after 2013." Tier 2 is likely to play a big part in banks' capital management going forward as they seek to build large buffers of capital to protect their senior debt holders. Under the Commission proposals, a bank would become subject to resolution when it has reached a point of distress such that there are no realistic prospects of recovery over an appropriate time frame, all early intervention measures have been exhausted, and winding up the institution under normal solvency proceedings would risk prolonged uncertainty or financial instability. "Entry into resolution will thus occur at a point close to insolvency," the Commission stated. "Authorities nonetheless have a degree of discretion to ensure that they can intervene before it is too late for resolution to meet its objectives." (Reporting by Helene Durand, Editing by Julian Baker, Alex Chambers) Link this Share this Digg this Email Reprints

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