Banks in Scandinavia Are Set to Dominate Bail-In Bond Issuance

A substantial chunk of the bank bonds needed to comply with new rules designed to protect taxpayers may come from Scandinavia, according to calculations by Danske Bank A/S.

In an extreme scenario, which assumes local regulators set the toughest criteria, the region’s lenders may need to find investors for more than $120 billion in notes to meet minimum requirements for own funds and eligible liabilities, or MREL, says Katrine Jensen, a credit analyst at Danske in Copenhagen. She estimates minimum issuance of these new kinds of bonds would be around $80 billion.

European banks may need to raise up to 276 billion euros ($290 billion) in funding to comply with MREL. The estimate, which is from the European Banking Authority, covers banks representing two-thirds of the industry. Most lenders, including those in Scandinavia, expect to roll over senior unsecured debt into the new instruments. The EBA says the outlook for MREL issuance is “uncertain.”

Sweden’s MREL

Most of Scandinavia’s bail-in bonds will probably come from Sweden, where the debt office has signaled it is ready to impose rules that mean all senior debt will be subordinated, according to Jensen. She says the EBA’s estimate probably doesn’t take this into account.

“While there is a risk of flooding the market with subordinated senior, it is likely that the Swedish National Debt Office will likely require all liabilities to be subordinated for MREL,” Jensen said.

Sweden is set to reveal guidelines at the beginning of 2017. Signals from Swedish authorities to date suggest high MREL levels and a subordination requirement, Jensen said. Assuming that holds, potential issuance at Sweden’s four biggest banks could reach 657 billion kronor ($73.6 billion), most likely to be issued in euros and dollars, she said.

Sweden is likely to phase in its requirement gradually, and subordinated senior issues will probably replace regular senior issuance over time, according to the Danske analyst. This will probably have an effect on pricing, with “a tightening in spreads on senior bonds and tighter spreads on non-preferred senior than in an EU context due to the still higher issuer rating of Swedish banks,” she said.

Global SIFIs

Nordea Bank, Scandinavia’s biggest lender, is the region’s only global systemically important financial institution. That means it’s subject to total loss-absorbing capacity requirements, which entail automatic subordination. Still, Swedish MREL is likely to be “tougher,” Jensen said.

In Denmark, the bankers’ association says it has received guidance from the regulator that banks won’t be subject to the same strict subordination requirements. If the Danish Financial Supervisory Authority were to follow the same standards as Sweden is expected to, the country’s four biggest banks would need to fill a shortfall of 186 billion kroner ($26.7 billion) in subordinated senior debt, according to Danske. Jensen says it’s unlikely Danish banks will be required to issue that much.

Danske Bank, Denmark’s biggest lender, has said it’s confident it already has enough eligible debt to comply with MREL.

Risk Weights

Jensen says Nykredit Bank, a unit of Denmark’s biggest mortgage lender, would have a minor shortfall relative to EBA rules. But that wouldn’t be an issue for them to fill, she said. For Danish banks, tougher risk weight requirements may affect MREL calculations, Jensen said.

The Danske analyst doesn’t expect Norway’s regulator to force its banks to meet MREL rules in the near future, because the country is still in the process of implementing the broader framework for bank recovery and resolution directive of which MREL forms a part. Jensen estimates Finland’s financial industry would need to issue a maximum of 7 billion euros.

With most of the expected issuance coming from Sweden, it’s worth noting that the debt office (which is the country’s bank resolution authority and therefore in charge of MREL implementation) disagrees with the regulator on subordination. The debt office has suggested that all MREL compliant debt should be subordinated, a position the FSA says may create refinancing risks.

Still, Moody’s estimated last year that Sweden’s four biggest banks alone would need to replace as much as 588 billion kronor of existing debt.

Jensen said regulators and debt offices across the Nordic region are expected to provide more clarity on the subject this year.

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