UPDATE 2-Euro zone banks’ shortfalls in loss-absorbing buffers up to $216 bln- regulator


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(Adds European Banking Authority statement)

BRUSSELS/LONDON, Feb 17 (Reuters) – Euro zone banks had combined shortfalls in their loss-absorbing buffers of up to 200 billion euros ($216 billion) at the end of 2018, according to estimates on Monday from the bloc’s watchdog that deal with banks when they fail.

Under international and EU banking rules, large banks must issue expensive loss-absorbing debt known as TLAC and MREL that can be converted into capital during crises to shield taxpayers from having to bail out lenders in trouble.

Very big systemic banks, such as Deutsche Bank or ING, are already required to meet these debt targets. The rule will kick in for other large banks from 2022.

Banks under the watch of the EU’s Single Resolution Board, the EU regulator in charge of disposing of failing lenders, have already issued 2.3 trillion euros of loss-absorbing buffers, mostly in the shape of senior unsecured and senior non-preferred debt.

But to meet the overall target by 2022, they will need to issue more debt to cover a gap estimated between 150 and 200 billion euros, according to SRB’s figures updated to the end of 2018 for a sample of 107 banks.

In relative terms, the shortfall is estimated at less than 3% of the target, but includes up to 70 billion euros of subordinated debt which costs banks more to issue as it is more risky for creditors.

The European Banking Authority (EBA), which writes rules for banks across all EU states, said many of the banks with shortfalls already hold similar instruments worth 67 billion euros, though are not eligible as MREL.

“This shows that some banks already have a sophisticated investor base, likely to invest in long-term unsecured debt such as MREL eligible instruments,” EBA said in a statement.

“In the light of these shortfalls, the EBA encourages European resolution groups to take advantage of the current positive market conditions to issue and build up resources,” EBA said.

There would be “enhanced action” among regulators to ensure that shortfalls in MREL are plugged, EBA said.

The shortfall does not include debt issued under English law, which cannot be used as a loss-absorbing buffer after the Brexit transition ends in December.

In 2018 the SRB estimated the overall debt issued under English law by euro zone banks at around 100 billion euros.

The exposure to debt that may no longer be eligible as buffer is now much smaller, an EU official said. (Reporting by Francesco Guarascio in Brussels and Huw Jones in London; Editing by Andrew Heavens)


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