Banks address ‘too big to fail’ question with debt shift – Financial Times – bank debt – Google News

Leading British banks have started reshaping their funding strategies amid regulatory pressure for a solution to the problem of lenders being “too big to fail”.

Barclays and Royal Bank of Scotland have in recent weeks issued debt at the level of their group holding companies as central banks push for structures that are easier to handle in the case of a major failure.

Regulators want many banks to adopt a strategy known as Single Point of Entry (SPE) to make it easier to impose losses on investors and creditors at a top-down, holding company level, while keeping the bank’s operating divisions running smoothly.

Banks worry they could face higher funding costs as a result, partly because holding companies tend to attract a lower credit rating than operating units.

Michael Raffan, a partner at the law firm Freshfields, described SPE as the “Holy Grail” of regulators’ plans to resolve a failing bank, but he added that there were difficulties in making it work.

“The fact that some of the UK banks are starting to issue debt at a top company level is entirely consistent with their resolution planning progressing along single point of entry lines,” he said.

If one of the operating companies runs into serious trouble the losses can be moved upstream to the holding company, where the equity is written down and losses are imposed on debt holders, in a so-called bail-in process that avoids a taxpayer bailout.

The alternative is known as Multiple Point of Entry, which is better suited to banks operating as constellations of locally capitalised subsidiaries – such as Santander – and where a lender would fragment in a resolution process.

Global regulators are urging big banks to opt for one of these two resolution mechanisms. The Swiss banking watchdog Finma has recently said its preferred approach is for the SPE system, and senior bankers detect a similar enthusiasm in Britain.

David Strachan of the Deloitte Centre for Regulatory Strategy said that the holding company issuance in the UK did not yet amount to a “big bang” shift, because “it is not clear whether it is necessary for firms to commit to a particular solution yet”. Among the banks whose strategy is still unclear is HSBC.

But moves towards the SPE model would bring lenders closer into line with US banks, where debt has historically tended to be issued at a holding company level alongside equity.

Bankers argue that despite the apparent enthusiasm for the SPE model regulators around the world are still pursuing conflicting agendas.

Kevin Nixon of the Institute of International Finance said the US Federal Reserve policy to require foreign banks to set up an intermediate holding company for their US operations was creating a “hybrid system” in which there is a single point of entry in the US and effectively multiple entry points globally.

“The industry is fully committed to ending too-big-to-fail but there are a lot of unanswered questions here,” he said.

Barclays in November and December issued a total of around $3.3bn of Additional Tier 1 securities at a holding company level. Analysts say the move is a first step towards Barclays issuing the majority of its subordinated and senior unsecured debt from its holding company.

RBS issued $2bn of debt from its holding company in December, on top of sales during the summer and this time last year. Credit Suisse said in November it was planning to issue bail-in-able debt from its group holding company.