European Banks Are Playing Fast and Loose With Their Riskiest Debt

To call or not to call, that used to be the question for European banks deciding whether to refinance their riskiest debt in a tussle between pleasing investors or satisfying regulators. But there might be a compromise available.

Rising interest rates and widening credit spreads over government debt are posing refunding problems for some of Europe's smaller banks. This is most evident with the riskiest type of bonds, which banks have to issue to fulfill their capital adequacy requirements and which typically include call options giving issuers the right, though not the obligation, for early repayment. The surging cost of issuing debt this year has increased so-called extension risk, where investors end up owning a callable bond for longer than they may have originally hoped on purchase.