Dutch banks have received parliamentary approval to issue senior nonpreferred bonds, a new type of debt that will help lenders meet EU bail-in-able debt requirements. Large banks, in particular, are expected to make use of it, with issuance needs likely to rise in the long run as higher Basel III capital requirements kick in, credit analysts said.
The Dutch upper house's decision on Oct. 16 must still be ratified by the King, but that is a formality, according to credit analysts from RaboResearch and ING Research. Parliament's approval of nonpreferred bonds came a day after the European Banking Authority urged credit institutions to accelerate their bail-in-able buffer generation. EBA chair Andrea Enria warned Oct. 15 that eurozone banks have made little progress in debt issuance and there still is a considerable shortfall, especially at large and medium-sized lenders. The European Single Resolution Board has estimated the shortfall for the top 35 EU banks at some €125 billion.
The senior nonpreferred bond, a debt security that can be converted into equity in case a bank runs into trouble, was first adopted in France in 2016 as a means for banks to meet the global total-loss absorbing capacity, or TLAC, requirement, and the EU-specific minimum requirement for own funds and eligible liabilities, or MREL. The first rules requiring banks to hold a certain amount of capital and debt to be used in resolution instead of public money will come into force Jan. 1, 2019.
The EU has approved senior nonpreferred bonds as MREL eligible across the bloc but for banks to use it, national governments need to transpose it into law. In September, Spain and Belgium adopted the new type of debt.
Top Dutch banks plan new issues
The new law is important even though Dutch banks are relatively well positioned with respect to MREL and TLAC buffers, RaboResearch credit analyst Vaclav Vacikar said in an emailed comment.
The Netherlands' largest bank, ING Groep NV, will not make use of senior nonpreferred issuance as it will use another type of debt subordination that is compliant with MREL and TLAC rules. Bail-in-able debt is issued and held at a holding company, which could then be used to rescue subsidiaries, or operating companies, in cases of resolution. This is known as the HoldCo-OpCo approach.
The country's second-largest lender, Rabobank, announced at its half-year earnings presentation Aug. 16 that it plans to issue up to €5 billion in senior nonpreferred bonds in the next few years. The bank issued its first bond of this type on Aug. 22, one month after the lower house of parliament approved the new form of debt. The €1 billion issue arrived before the law was passed and was initially ranked equal to other senior unsecured instruments, Clifford Chance, the law adviser on the issue, said in a statement at the time. The bond will become MREL eligible as soon as the new national law is in place.
Other Dutch banks are expected to follow suit, Suvi Platerink, senior credit analyst at the financials group of ING Research, said in an email.
ABN AMRO Group NV and Volksbank NV, the third and fourth-largest lenders in the Netherlands, have indicated that they have plans to issue senior nonpreferred bonds. Volksbank aims at issuance in the range of €1 billion to €1.5 billion over the next few years, it said in its first-half earnings presentation Aug. 24. "Other Dutch names have not yet received their MREL requirements so they will likely wait for that before taking any action," Platerink said.
ABN AMRO has said it does not plan to issue senior nonpreferred debt before the end of 2018 and it already complies with MREL requirements, according to RaboResearch estimates, Vacikar said. Under EU rules, systemically important banks have to hold at least 8% of their total liabilities and own funds in MREL eligible instruments. While under TLAC, their total loss-absorbing instruments outstanding must be equivalent to at least 16% of risk-weighted assets as of Jan.1, 2019, with that level increasing to 18% from Jan. 2022.
Basel III impact
Despite progress on a national level, Dutch banks are yet to receive full clarity on their MREL needs as a few pieces of regulation are still not completed such as the finalization of the banking reform package, Vacikar said. Furthermore, the Single Resolution Board refreshes its policy every year, which can result in further tweaks to the existing rules.
Another key issue for Dutch banks is the expected rise in risk-weighted assets as the final Basel III capital requirements are gradually implemented from 2022. RWAs are used to calculate the common equity Tier 1 ratio of banks and their growth means a drop in the ratio.
"[S]omewhere down the line, the consequences of ... RWA inflation will result in higher MREL/TLAC issuance needs," RaboResearch analysts said in a note Oct. 18.