Sleep-at-Night Bank-Debt Buyers Seen Cool on TLAC Bonds
ByJohn Glover, Nicholas Comfort, and Ben Moshinsky
Douglas Flint, chairman of HSBC Holdings Plc, wants to know who’s going to buy the trillions of dollars of loss-absorbing securities that regulators plan to force the biggest global banks to have on their books. The interest at this stage from traditional consumers of bank paper, such as pension funds and insurers, is lukewarm at best. While the securities, designed to be written down in a crisis, would offer higher yields than senior debt, the risk of bail-in may be more than some buyers can tolerate. That could leave the banks struggling to meet regulatory requirements. The Financial Stability Board, the regulator led by Bank of England Governor Mark Carney, proposed last year that the world’s biggest banks be forced to have subordinated debt and other loss-absorbing liabilities equivalent to as much as a fifth of their assets weighted for risk. Banks say the move, intended to prevent more public bailouts, would drive up corporate funding costs. The FSB proposal on total loss-absorbing capacity, or TLAC, would apply to the FSB’s list of 30 global systemically important banks, with HSBC and JPMorgan Chase & Co. identified as the most significant. Standard & Poor’s estimates that these banks “would potentially need to issue in excess of $500 billion in TLAC instruments in the next four to five years,” based on the lower end of the FSB’s proposed requirement of 16 percent to 20 percent of risk-weighted assets. In their joint response to the FSB’s public consultation on TLAC, the Institute of International Finance and the Global Financial Markets Association said that “the volume of instruments in the market that will be subject” to the rule is about $4 trillion. “The TLAC equation for investors is based not only on how much demand for it there may be, but also on how the requirement itself changes the business model for issuing” banks, said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.