HSBC leads in UK banks’ deficit of bail-in debt

London / Bloomberg

Three UK banks, led by HSBC Holdings Plc, will have $77 billion of new loss-absorbing debt to meet requirements of the European Union and the Bank of England, Moody’s Investors Service said.
Barclays Plc, Royal Bank of Scotland Group Plc and HSBC will have to issue new debt to comply with the EU’s ‘minimum requirement for own funds and eligible liabilities’, or MREL, Moody’s said in a report. Of that, HSBC’s deficit, net of refinancing needs, is 40 billion pounds, according to London-based analysts Daniel Forssen and Laurie Mayers.
MREL, a requirement imposed by the EU’s Bank Recovery and Resolution Directive, sets out the capital that lenders need to protect against
failure, as well as the liabilities that could be wiped out or converted to let them continue to provide “critical functions” after a collapse.
The BOE is the first European regulator to propose requirements for MREL.
“It’s likely that existing operating company senior unsecured debt, which ultimately will not be eligible for MREL, will be replaced with eligible holding company liabilities and contractually subordinated debt,” Moody’s Mayers said in a statement.
If that happens, the gross shortfall, which amounts to nearly 2.9 percent of the adjusted tangible banking
assets, will ‘shrink to a manageable
54 billion-pound net shortfall,”
she stated.
Moody’s considered seven of the UK’s biggest banks, finding a gross shortfall of 129 billion pounds, including bonds that are maturing during the phase-in period.
“Bail-in bonds are effectively a new asset class in Europe so there are not many pricing points,” said Paul
Smillie, a leading Singapore-based credit analyst with ColumbiaThreadneedle, which manages about $470 billion.
“Given the size of HSBC’s balance sheet, the amount is quite manageable but they’ll have to pay up.”
Of the seven banks, only Standard Chartered Plc has no gross deficit. Lloyds Banking Group Plc, Santander UK Group Holdings Plc and
Nationwide Building Society will be able to refinance bonds that come due with the eligible securities, Moody’s said.
HSBC and Barclays have the largest net shortfalls, both by absolute amount and as a percentage of assets, Moody’s said.
HSBC’s deficit is the largest, with Barclays following at 9.9 billion pounds, while RBS will have to take on new liabilities of 3.8 billion pounds, according to Moody’s.
The large firms are likely to be able to comply with the BOE’s MREL requirements, both by refinancing existing debt as it comes due and by spreading out maturities, Moody’s said in the report. They may also shed assets, reducing MREL requirements, the ratings firm said.
HSBC Holdings plc is a British multinational banking and financial services company headquartered in London, United Kingdom. It is the world’s fifth largest bank by total assets, with total assets of US$2.67
trillion.
It was established in its present form in London in 1991 by the Hongkong and Shanghai Banking Corporation Limited to act as a new group holding company.
HSBC has around 6,600 offices in 80 countries and territories across Africa, Asia, Oceania, Europe, North America and South America, and around 60 million customers.
As of 2014, it was the world’s sixth-largest public company, according to a composite measure by Forbes
magazine.