The European Union has made a 180 degrees turn with respect to one of the most important regulations which will affect the banking sector in the coming months. Originally, Brussels created a new, specific instrument enabling the banks to boost their anticrisis cushions and comply in this way with the minimum requirements for shareholders funds and eligible liabilities to absorb losses, known as MREL. But now it has taken the sector by surprise with a draft regulation which accepts that all senior bonds can be included in the anticrisis buffer. Non-preferred bonds issued by the lenders would become nothing more than bits of scrap paper, at least in the case of the non-systemic institutions.
Two years after coming into force, the banks still do not know the requirements they need to meet. There is huge uncertainty and the lenders have never really had it clear which instruments they would need to raise their defences and avoid, as far as possible, another round of state-funded bailouts in a future crisis.
The new draft of the reform of the bank resolution directive opens up an important gap between the systemic and non-systemic banks in any one country because of the instruments they can use to boost their capital buffers. The impact of the cost savings the banks will achieve will be diluted as the senior bonds they have in their portfolio mature and they have to issue at the new prices. That said, for the systemic banks the difference will be maintained.