EU Bank Regulator Says Retail Bond Holdings May Affect Bail-Ins

European Union officials newly charged with handling troubled banks would take account of the “public interest” before imposing losses on retail bondholders.

Some weak banks may have sold bonds to vulnerable households, rather than big investors, which should be considered before the Single Resolution Board decides on a so-called bail-in, Vice Chairman Timo Loyttyniemi said at a Euromoney conference in London.

“The question is: who holds the debt, and who has the debt been sold to?” Loyttyniemi told a panel on resolving failed banks Tuesday. The SRB may consider alternatives to imposing losses on bonds if they’re owned by “a household who thought they were more protected by that instrument than the true reality,” he said. 

Holders of bank bonds at big money managers have clashed with governments and regulators over attempts to clean up weak banks without imposing losses on equal-ranking smaller investors. All investors would ultimately be dealt with equally, Loyttyniemi said in response to concerns that larger bondholders would be relegated below retail investors.

A bail-in of small bondholders at four small Italian lenders in November led to protests by savers, a nationwide selloff of bank debt and at least one suicide. Conversely, larger bondholders such as BlackRock Inc. and Pacific Investment Management Co. were affected when Portugal’s central bank transferred about 2 billion euros ($2.3 billion) of senior bonds to a bad bank in December while leaving equivalent-seniority notes predominantly held by retail investors untouched. The SRB wasn’t involved in either decision.

“Will we get treated differently to bonds we think are pari passu but in fact are held by retail investors who may get bailed out ahead of us?” Steve Hussey, head of financial institutions credit research at AllianceBernstein Ltd. said at the same conference. “That’s what we worry about, if we do come to a resolution.”

Pari passu refers to claims of equal standing in a company’s capital structure.

The SRB came into operation this year to manage conflicts arising from the failure of banks.

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