Skip to comments.European Banks Dump Massive Amounts of Subordinated Debt on Investors
Posted on 12/20/2013 6:36:03 AM PST by Kaslin
The Financial Times notes a Big rise in subordinated debt issuance by EU banks
Banks have taken advantage of yield-chasing investors to issue $90.7bn of subordinated debt for the year to date, a 41 per cent increase compared to the same period in 2012. It is the highest such volume since the $122.4bn seen in 2008 according to Dealogic, the data provider.
The figures follow a deal agreed by European regulators earlier this month that will bring in so-called bail-in rules for senior bondholders from 2016, two years earlier than envisaged by finance ministers in their common position agreed in June.
Banks are also expected to issue record amounts of loss-absorbing contingent convertible or coco bonds next year, which can either convert to equity or wipe out investors entirely if a banks capital ratio falls below a pre-agreed level.
An apt description for "subordinated debt" is "junior bonds". From Wikipedia ...
Now that we know what subordinated debt is, it's easy to understand the increase in issuance. It relates to bail-in procedures in the alleged European "banking union".
Laughable Eurozone Banking "Non-Union"
Consider my post on December 17, 2013: Laughable Eurozone Banking "Non-Union"; Expect Disorderly Breakup
Gunnar Hökmark, the lead negotiator for the parliamentary side, said: We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers."
Details show the alleged rainy-day fund is a pathetic 12.5bn of joint funds not available until 2020, even though 128 banks covered in the agreement have an aggregate balance sheet somewhere between 26 trillion and 27 trillion.
Also consider "stress tests".
European Central Bank President, Mario Draghi Says ECB Wont Hesitate to Fail Banks in Stress Tests.
For details, please consider ECB President Mario Draghi Announces New Stress Tests; Translating "Draghize"
Perhaps the possibility of genuine stress tests, however slight, has sent banks running for cover.
Another possibility is banks are so poorly capitalized that some will fail even with watered down stress tests.
This lead to the key question: If banks are issuing subordinated debt because they need to, why should anyone want it?
For this type of security, very few are sold directly to individual buyers. If you studied the prospectus, you’d run away.
But if there is a EFT that pays 6% interest, nobody asks too many questions about what’s in it.....until you find out the hard way. Yeah, it’s diversified, they have junk from fifty different issuers.