Is that Desperation Hanging Over Europe’s Banking System?

by Don Quijones, Wolf Street:

Turns out, Italy’s banking crisis is not fixed.

Many of Europe’s and America’s biggest banks have begun begging, cap in hand, for a new, innovative way of raising vast sums of dirt-cheap debt on Europe’s financial markets.

The Association for Financial Markets in Europe (AFMA), an organization that prides itself on serving as “the voice of Europe’s wholesale financial markets,” just sent a strongly worded letter to the European Central Bank, urging for the prompt creation of EU-wide regulation allowing banks to sell a newfangled class of bail-in-able debt called “senior non-preferred bonds.”

“A swift agreement is essential to enable banks to continue increasing their loss-absorbing cushions and improve their resolution capacity,” says the letter (translated from Spanish).

In its own words, the AFMA represents “leading global and European banks and other significant capital market players.” Its board includes representatives of the biggest banks, from US megabanks like Citi, Goldman, JP Morgan Chase, Morgan Stanley, Bank of America Merrill Lynch and BNY Mellon to European behemoths like Deutsche Bank, HSBC, Lloyds TSB, Barclays, Unicredit, ING, BNP Paribas, Credit Agrcole, Crédit Agircole, and Credit Suisse.

Many of these banks and a few others not directly represented on AFMA’s board (such as Spain’s Santander) are facing heightened regulatory pressure, both at the regional and global level, to issue increasingly more bail-in-able debt so as to ensure that the next time a banking disaster strikes, part or all of the debt can be used to “bail in” those investors before taxpayers are called upon to cough up the rest.

It’s the way it should have been from the very inception of this global banking crisis. Instead, governments and central banks have injected trillions of dollars, euros, pounds, yen, and yuan of public funds into banks to keep the banks upright and make most bondholders whole, including those holding subordinated, or junior, debt, which is theoretically designed to bear losses in times of stress.

The “senior non-preferred bond” is the financial system’s latest effort to finally change all of that. Also known as senior junior, senior subordinated or Tier 3, this newfangled class of bank debt is a hybrid creation that combines the biggest drawback (for investors) of senior debt (i.e. low yields) with the biggest drawback (once again, for investors) of subordinate debt (i.e. virtually no protection in the event of a banking collapse).

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