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The European Banking Authority, which oversees the union’s banking system, already warned in October that English-law bonds now counting toward the EU’s minimum requirement for own funds and eligible liabilities (MREL) could be discounted once the UK leaves the EU.
However, the Single Resolution Board (SRB), which sets the requirements for banks in the eurozone, announced that liabilities issued under third-country law will be excluded from MREL unless the bank can show that their write-down or bail-in would “be effective”.
That essentially means the UK would have to statutorily recognize the authority of the EU to bail-in or write down such bonds, or alternatively that banks would have to add contractual clauses recognizing that authority.
The latter option, in turn, would require issuers of such bonds to go through consent solicitations on each issue to maintain eligibility – something investors would almost certainly demand a premium for.
Many bankers don’t expect the exclusion to apply to outstanding bonds, which would only make it more onerous for their banks to comply.
However, people familiar with the SRB’s thinking said that, while they don’t know the volume of outstanding bonds that would be affected, a no-deal Brexit would mean outstanding bonds based on English law would not count toward requirements – though banks will have a maximum four-year transition period to meet their targets.