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European banks worry higher funding costs may thwart new debt issuance in 2019

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European banks worry higher funding costs may thwart new debt issuance in 2019

European banks consider pricing to be the main hurdle to new debt issuance in 2019, especially when it comes to instruments that are eligible to absorb losses in the event a bank runs into trouble, according to the EU's banking watchdog.

For its latest risk assessment questionnaire, the European Banking Authority surveyed 150 credit institutions, representing more than 80% of the EU banking sector. Two out of three banks plan to issue more loss-absorbing debt to meet the EU minimum requirement for own funds and eligible liabilities, or MREL.

Banks are now in the final year of transition to the MREL rules; introduced in 2016, the rules had a four-year phase-in period which ends Dec. 31, 2019.

The EU Single Resolution Board, in charge of MREL implementation, will require all banks under its remit to hold a minimum amount of MREL-eligible instruments equal to 8% of total liabilities and own funds. Each bank will also receive an individual MREL target from the EU and national authorities that will raise the required buffer into the double digits.

In a progress statement in June 2018, the SRB estimated the average MREL requirement per bank at 26% of risk-weighted assets, based on talks with 80 banks. The board found an average shortfall of 1.8% of RWA per bank, corresponding to an overall absolute amount of €125 billion.

As most banks plan to ramp up their MREL-eligible debt issuance, roughly 50% of the EBA survey respondents expressed concerns about higher costs for such issues. But most analysts believe credit institutions will be able to issue the necessary debt despite the expected increase in pricing, the authority added.

Funding costs have risen considerably over the past few months, so the banks' responses do not come as a surprise, RaboResearch credit analysts said in a Jan. 9 note. The biggest challenge will be for smaller lenders that are not regular issuers of such instruments, as the increased costs will eat into their profits, the analysts said.

The EBA also found that banks are now considerably less worried about MREL targets and eligible instruments.

The proportion of institutions that named the determination of actual levels of MREL as a constraint fell to 50% at the latest survey, compared to 65% a year ago, the EBA said. The share of lenders considering MREL eligibility of instruments as a barrier dropped to 40% from 55% over the same period.