Rating agency DBRS Ltd. has placed the subordinated debt of 23 European banks under review with negative implications in view of the recent developments towards a new regime to resolve failing banks in Europe.
The rating agency says that, while the required legislation has yet to be implemented in some countries, recent developments in the region are enough to give regulators the framework they would need to treat subordinated and hybrid debt holders as a source of capital in a failing bank. As a result, it is reviewing the ratings and its notching practices for these instruments.
The new framework for the resolution of banks in Europe, which is to be implemented starting in January 2016, includes the ability to “bail-in” certain liabilities of failing banks to minimise a distressed bank’s reliance on public financial support.
DBRS currently rates subordinated debt either one or two notches below senior unsecured debt, which incorporates some assumption of systemic support. Now, however, as these instruments appear less likely to receive systemic support, subordinated debt and hybrid ratings are likely to be lowered by one notch, it says. The review of the current subordinated debt and hybrid ratings that are notched from the senior rating is likely to take no longer than 90 days, it says.
“Taken in isolation, such capabilities also have negative implications for senior bondholders. However, within the broader context of the increased constraints on banks’ risk taking, higher capital requirements, increased liquidity requirements, and an environment of enhanced regulation including the creation of a single European bank regulator, DBRS considers the overall impact on banks’ senior debt is still evolving,” it says.