To cover a capital shortfall of €50 billion.
TBTF banks in Europe are facing regulatory pressure to issue increasingly more so-called “bail-in-able” debt. Investors don’t like this kind of debt and demand higher yields. So this debt is expensive for banks. But as the pressure rises, we are likely to see a surge in issuance of riskier and presumably higher-yielding, and therefore costlier bank debt.
But France has figured out a way to pull a bag over investors’ heads with its newfangled class of bailinable debt – or rather a newfangled name for it.
France is home to four G-SIBs (twice as much as Germany and Italy combined): BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale. According to analysts at ABN Amro, the four banks have a total eligible capital shortfall of €50 billion, that will need filling by 2019:
Under our calculations, BNP Paribas currently has the largest shortfall, and it would require EUR 26 bn of eligible capital. The other three French banks also all have eligible capital shortfalls, albeit smaller… (EUR 24bn for the three other banks combined), approximately 1% of their risk weight assets.
To help fill some of those holes, financial engineers in France have kindly created a new debt class called senior non-preferred bonds (AKA senior junior, senior subordinated or Tier 3), which have been hastily accepted by France’s market regulators. Within days of the regulatory change Credit Agricole had issued €1.5 billion of the 10-year bonds. Société Générale is preparing its own five-year offering, and BNP Paribas is poised to follow.
It’s just the beginning…
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