EU states vie for upper junior debt requirement for big banks

BRUSSELS (Reuters) – EU finance ministers could approve next week a broad reform of EU banking rules setting the level of reserve needed to absorb losses, but states remain divided over the amount of subordinated debt that large lenders must issue.

The possible agreement at the Ecofin meeting on 4 December would come after two years of negotiations on a reform that would adapt EU capital rules to global agreements with US and Japanese regulators. .

However, the final agreement is still contingent on a compromise on the amount of subordinated debt that the big banks would be required to issue under the new rules.

This junior debt would be erased if a lender had problems, so that taxpayers would not be burdened with the rescue of bank bills, as happened after the 2007-08 global financial crisis.

However, as investors become increasingly concerned about the stability of banks in the bloc's highly indebted countries, such as Italy and Greece, the cost of issuing second-tier debt may become prohibitive for some lenders .

The last Italian bank, UniCredit (CRDI.MI) paid a heavy interest on a $ 5 billion five-year subordinated bond sold to Pacific Investment Management Co (Pimco), sources said Wednesday.

Italy is among the European Union states that want subordinated debt to be set at no more than 27% of the total risk-weighted assets held by large systemic banks, such as Unicredit or Deutsche Bank (DBKGn.DE).

Northern European governments, led by Germany, are demanding a 30% cap, two European officials told Reuters on Thursday.

Currently, the requirement of subordination is not binding.

The European Parliament, which also has a say in the matter, favors the lower limit of 27%, although it agreed that the ceiling would be "discretionary".

"This means that the resolution authority may require an even higher level of subordinated debt if it is warranted," said Gunnar Hoekmark, the European legislator in charge of the matter.

A head of the Austrian EU Presidency said he was "confident" that a compromise could be found Tuesday by finance ministers.

But, a sign that the issue remains highly controversial, diplomats are not expected to solve the problem before the ministerial meeting, as usually happens in technical files.

BAD LOAN SALES

If ministers fail to compromise on subordinated debt, the approval of the entire legislative package will be delayed.

Among the measures that could be blocked is a rule to facilitate the massive sale of bad debts.

According to a draft compromise, seen by Reuters, banks that sell more than 20% of their non-performing loans (NPL) may face lower capital requirements to offset the losses caused by the downward revaluation of their assets. .

The easiest conditions, supposedly favoring the unloading of a pile of degenerative loans of 800 billion euros (909 billion dollars) still weighing on the banks of the EU, would be possible from 23 November 2016 – date on which the European Commission published its reform of the banking system proposal – up to three years after the entry into force of the new rules, the document states that dates and key figures remain in parentheses and can be modified .

Another risky reform is the freezing of deposits in bankrupt banks. European legislators have agreed to allow this "moratorium" for up to "two business days" in the banks being liquidated.

In a preliminary compromise, insured savings of less than 100,000 euros and small business deposits could also be frozen, although "some payments" may be allowed, says the EU document.

The measure aims to prevent bank rushes from failing lenders and give the authorities time to find a buyer for a troubled bank or sell its assets.

Critics, however, have argued that this measure could further reduce consumer confidence in banks and, in the worst case, trigger a liquidity crisis and even bank rushes.