Below is a link to a good article written by Risk Magazine (subscription required) on the tension between the proposal that banks issue bail-in debt and the requirement that those same banks comply with the Net Stable Funding Ratio (NSFR).
The NSFR is a liquidity ratio which is to be introduced in 2018 as part of the Basel III reforms. It is designed to address the problems that can arise due to liquidity mismatches, such as those which affected Northern Rock. Broadly speaking, its purpose is to align more closely longer-term, less-liquid assets with longer-term liabilities.
In summary, the article claims that the effect of the bail-in proposals would mean that “banks would have to sell more bonds at a higher cost to a smaller group of buyers”. It points to a body of research which estimates that banks will have to issue EUR 2.7 trillion in long-term debt in order to comply with the NSFR. However, it also notes other research which suggests that:
- a significant proportion of investors do not regard bail-in senior debt as an investable asset class;
- investors who may continue to take bail-in risk may demand as much as a 345 basis point premium on spreads in order to do so;
- concerns persist as to whether conversion/write-down clauses in bail-in debt would mean that these events would no longer qualify as “Credit Events” for the purposes of CDS transactions; and
- The effect of the risk-based capital guidelines for insurers which form part of the Solvency II reforms to take effect in 2014, will be to encourage insurance companies to invest in shorter-dated securities, rather than the longer-dated securities which Basel III will encourage banks to issue.
The article can be found here: