The European Banking Authority (EBA) put out an opinion paper on Brexit earlier this month, warning banks that they ought to issue debt under EU27 law if they want to be sure it will remain eligible for MREL past March 2019 — or at least insert clauses into their bonds recognising the powers of EU resolution authorities.
The problem, according to the EBA, is that English law instruments will have to be treated as non-EU instruments if the UK does not secure legal equivalence with the EU, or some other agreement in this area.
Bank treasury teams speaking to GlobalCapital were pretty relaxed about the idea that Brexit might present them with a “cliff-edge” scenario, where one day they meet their capital requirements and the next day they do not.
Maybe this is the sort of can-kicking that has seemed to characterise the Brexit process since the UK electorate vote to leave the EU on June 23, 2016. But more likely, it is a pretty pragmatic attitude.
There are all manner of ways in which bonds issued by EU27 banks could continue to meet all of the required criteria for Europe’s capital standards.
For one thing, the UK could give statutory recognition to the actions of resolution authorities in Europe, a possibility that the EBA also noted in its opinion paper earlier this month.
And UK law may already give enough clarity on this issue, without needing modification — one capital markets lawyer told GlobalCapital that the principle of cooperation with other authorities was mandatory under the UK’s banking law, EU member state or not.
But more convincing is the fact that it would simply be self-punishment for Europe to de-certify bonds because of Brexit.
Nomura estimates that banks in the EU have issued about €126bn of tier two and additional tier one (AT1) debt under English law — that's a pretty big number and it doesn't even include senior unsecured debt.
It would be extremely surprising if European authorities were even contemplating pushing that much debt offside in the event that English law became non-EU law. Few expect an English court would disrespect the decision of an EU resolution authority if it were outside the bloc. Indeed, English law’s transparency and predictability is a part of the reason that so many European banks choose it in the first place.
So it is not exactly clear how helpful it is for the EBA to warn banks about the potential “de-recognition of instruments issued under English law”.
Surely the regulator's energies would be better placed trying to provide the European banking sector with a bit of clarity — something that has been sorely lacking in any areas relating to the UK’s departure from the EU. Instead of issuing dire warnings, European supervisors and lawmakers should be talking loudly and clearly about grandfathering old MREL bond contracts that may be caught in the fallout from Brexit.
There has already been progress granting grandfathering arrangements for outstanding bonds that contain a number of features that do not strictly meet all MREL criteria — including acceleration clauses and set-off rights.
It's time to do the same for Brexit contracts.