ECB's Nouy Says Legal Change Is Needed to Provide CoCo Clarity

  • Investors are adapting to `bail-in world,' need transparency
  • Commission's proposal to split Pillar 2 requirements `useful'

Investors in banks’ riskiest debt are adapting to a world in which they may make losses when banks stumble and they need a legal framework that doesn’t leave them guessing about the rules, the head of euro-area banking supervision said.

The European Central Bank is studying the European Commission’s proposal to overhaul rules governing payouts on contingent convertible bonds, or CoCos, ECB Supervisory Board Chair Daniele Nouy told journalists in Frankfurt on Wednesday. While the makeover is still a “work in progress,” the result should be set in firm legal rules, she said.

Investors are adapting to “the new bail-in world, and they don’t like uncertainty, investors and markets, and if they feel they are in a situation with uncertainty, they hit the banks for that,” Nouy said. “That’s why we absolutely need to deliver certainty, clarity, transparency to the market.”

The main uncertainty concerns rules that can trigger restrictions or cancellations of discretionary payments, including CoCo coupons. They stem from Pillar 2 capital requirements that supervisors set bank by bank, and which under European Union rules determine the maximum distributable amount, or MDA, they can pay out.

Nouy said last year that supervisors regard EU law as unclear on Pillar 2 and asked the commission for clarification. The commission responded this month with a proposal that included splitting Pillar 2 into parts setting out what is required and what is “guidance,”
and suggested making CoCo coupons senior to stock dividends and bonuses.

Nouy said that the distinction may be “useful,” adding that clarification of the capital requirement should be enshrined in EU law.

“I would even go further, I think clarity regarding the maximal distributable amount, on top of the clarification already received, should be in the legislation to provide full clarity and transparency to the market,” she said.