France considers new type of loss-absorbing debt for banks

France is considering allowing banks to issue a new type of senior debt that could be used to absorb losses if they run into financial trouble, according to a proposed amendment to its financial code. Governments around the world are bringing in new regulations to ensure taxpayers will not have to foot the bill if a bank fails, as happened during the 2008-9 financial crisis. But they differ over how a lender's creditors should be treated in such a scenario.
Rather than forcing existing bank senior bondholders to take on greater risk, France is looking to introduce a new class of bonds that could form part of a bank's total loss-absorbing capacity (TLAC). "The project of the government reform would change the order in which creditors of banks are called upon in case of insolvency," the Finance Ministry said in a statement late Sunday.
It would involve creating "a new class of loss-absorbing debt securities". The new type of unsecured bonds, which could be called "senior junior", would find its place in the hierarchy of creditors between subordinated debt and "classic" senior debt, a Paris-based financial analyst said. "The introduction of a new type of debt should be seen as positive for the existing stock of senior unsecured debt which will become "preferred" as well as Tier 2 bonds," analysts at BNP Paribas said.
France is taking a different approach from Germany, which has forced senior bondholders down the pecking order when it comes to making claims against an ailing bank. British banks are increasingly issuing holding company debt which is more subordinated than operating company debt. One French banker said issuing the new type of securities was expected to be cheaper than issuing subordinated debt and that banks had until 2019 to bolster their buffers.
CreditSights analysts said the proposal should be supportive of the major French banks' senior and Tier 2 bond spreads in the short term. However, the reform will result in France's biggest listed banks having to issue more debt to meet their TLAC requirements, compared with German counterparts. BNP Paribas and Societe Generale have the biggest shortfall in TLAC-eligible capital among French lenders, needing to raise 34 billion euros ($37 billion) and 20 billion euros of capital respectively. Ratings agency Standard and Poor's put BNP Paribas' 'A+' long-term rating on CreditWatch with negative implications in December, saying the bank had issued less subordinated and hybrid debt over the past few years, while it waited for the TLAC rules to be finalised.