On Monday, Euro zone banks had combined shortfalls in their loss-absorbing buffers of up to 200 billion euros ($216 billions) at the end of 2018, estimates from the bloc’s banking watchdog showed.
Under international and EU banking rules, large banks must issue expensive loss-absorbing debt known as TLAC and MREL that can be converted into capital during crises. Very large systemic banks, such as Deutsche Bank or ING, are already required to meet these debt targets. The rule will kick in for other large banks from 2022.
Banks under the watch of the EU’s Single Resolution Board, the EU regulator in charge of disposing of failing lenders, have already issued 2.3 trillion euros of loss-absorbing buffers, mostly in the shape of senior unsecured and senior non-preferred debt.
However, according to SRB’s figures updated to the end of 2018 for a sample of 107 banks, to meet the overall target by 2022, they will need to issue more debt to cover a gap estimated between 150 and 200 billion euros.
In relative terms, the shortfall is estimated at less than 3% of the target, but includes up to 70 billion euros of subordinated debt which costs banks more to issue as it is more risky for creditors. The shortfall also does not include debt issued under English law, which can not be used as a loss-absorbing buffer after the Brexit transition ends in December.
In 2018 the SRB estimated the overall debt issued under English law by euro zone banks at around 100 billion euros.
The exposure to debt that may no longer be eligible as buffer is now much smaller, an EU official said.
Reported by Francesco Guarascio
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