The news they're burying in "Trump Week"
Stock-Markets / Financial Markets 2016 Nov 15, 2016 - 12:02 PM GMTBy: Submissions
Trump.
Trumpety-trump.
Trump Trump Trump.
Tell me I’m not the only one who had this in my head when I turned on the news this morning.
Or logged onto a website.
Or opened a newspaper.
I think something like the first seven or eight headlines on the FT’s app this morning were about Trump.
I know it’s big news. But it’s not the only news.
Makes me wonder... what bad news is getting buried this week?
Shovels out!
Oh look. The Bank of England decided Tuesday was a great day to put out a press release about something called MREL.
MREL stands for minimum requirement for own funds and eligible liabilities.
It’s part of the ongoing effort to end Too Big To Fail and bank bailouts.
Instead of bailouts, the idea is that in future failing banks will be rescued via a bail in.
MREL is to set out how much loss absorbing capacity each bank needs to have, depending on how big it is and how likely it is its failure would collapse the system.
Banks can hold this loss absorbing capacity as a mixture of equity – meaning a bank’s shareholders take the hit if it needs to be rescued – and debt that can be converted into equity if needed.
Think of the so-called CoCo (contingent convertible) bonds I wrote about in February, when these bonds were giving Deutsche Bank a big headache (which hasn’t gone away, incidentally):
”These are bonds that can be written down or converted into equity (i.e. shares in the bank) if a bank’s capital buffer – the amount it has available to absorb losses – falls below a predefined threshold.
“So in the good times, investors get paid a coupon the same as any bondholder. But if the bank gets into difficulties, it can ‘bail-in’ CoCo investors, giving them shares in a now struggling institution.”
So what’s significant about the news published on Tuesday?
I find two things interesting. First, the large banks will now have until 2022 to issue the required amount of debt that can be bailed in.
The original deadline was 2020.
It’s interesting because on the one hand Mark Carney likes to talk about how robust the system now is.
But on the other hand the Bank of England says banks need to boost their loss absorbing capacity. And it’s now acknowledged they’re going to need more time to do it.
The other reason this is interesting is that it’s another step on an important journey.
“The Bank of England now has the legal powers necessary to manage the failure of a bank,” Tuesday’s press release says, “and significant progress has been made to ensure there is coordination between national authorities should a large international bank fail.”
If you’ve got your free copy of Jim’s new Road To Ruin book and had a chance to read it, you’ll already know exactly where this is leading.
And if you haven’t, secure your copy here before you read the rest of today’s DR.
The term “eligible liabilities” is interesting, because it’s rather broad.
A bank deposit is a liability. It’s the bank’s liability to you as its customer.
MREL isn’t laying out plans to bail in depositors. Not explicitly.
Yet don’t be lulled by the talk of “special debt”, “stress tests” and the like.
The approach is entirely reliant on regulators getting a number of difficult (perhaps impossible) things right.
They need to make sure these minimum levels are enough. And they need to make sure their stress tests take account of the worst things that might happen, and accurately model their impacts.
But how can they know?
And all this is assuming there are enough saps willing to invest in all this new “special debt” (no doubt institutional investors like pension funds will be given plenty of “encouragement”).
If MREL turns out to be as strong as the pre-2007 safeguards, then to whom will they turn to make up any shortfall?
Don’t rule out it being you and your savings.
The principle of bail in is now set. The various mechanisms are being put in place.
You can see where this is heading...
I’ll let Jim take it from here. Follow this link to find out more about what he calls the “Ice 9” plan to use your money to fix their crisis.
Tomorrow we’ll have a look at another big development in this story that also just happened to take place as Americans were going to the polls!
Until next time,  Ben Traynor |
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