France Comes up with a Real Jewel to Prop up its 4 TBTF Banks

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To cover a capital shortfall of €50 billion.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

New language can often serve as a cryptic signpost to the future. This is particularly true in finance. Take the expression “Too Big to Fail.” Within months of the fall of Lehman Brothers, the expression was being used so widely that it ended up being abbreviated to the now instantly recognizable TBTF.

For the captains of the global financial industry in their plush seats on the Basel-based Financial Stability Board, a TBTF bank was too simple and vulgar an iteration, so they coined a new term with a little more gravitas: Global Systemically Important Bank (or G-SIB).

Now a new word is coming into common use: “bailinable” (bail-in-able).

Bailinable debt consists of hybrid debt securities that automatically convert into equity and/or have their face value mercilessly slashed if some pre-defined trigger is met (usually linked to the issuer’s capital). It includes subordinated debt and high-risk instruments like the contingent convertible (CoCo) bonds that are designed to be bailed in first when a bank gets in trouble. Deutsche Bank’s CoCos famously crashed earlier this year, as did many other bank CoCos, but they’re once again in vogue.

Bailinable debt comes into play when a bank is about to go belly up. Part or all of the debt can be used to “bail in” a bank before taxpayers are called upon to cough up the rest. By providing additional resources when needed, bailinable debt should reduce the need for publicly funded bailouts in the resolution of bankrupt banks.

It’s the way it should have been from the very inception of this global banking crisis. Instead, governments and central banks have injected trillions of dollars, euros, pounds, yen, and yuan of public funds into banks’ hole-riddled balance sheets, while most bondholders have been made whole, including those holding subordinated, or junior, debt, which is theoretically designed to bear losses in times of stress.

Now, thanks to regulatory changes at the European and global level, some bondholders may have to finally begin paying the price of risk. But it’s unlikely to be senior bondholders. According to the Basel III Total Loss Absorbing Capacity requirements for global systemically important banks (yeah, them again), set by the Financial Stability Board, senior unsecured bonds will remain at the top of the fixed-income pile. That means they won’t be part of a bank’s total loss absorbing capacity and won’t be subject to the new bail-in rules.




That’s reassuring news for senior bondholders, but it’s not such good news for the TBTF banks that are facing regulatory pressure to issue increasingly more bailinable debt. Investors don’t like this kind of debt and demand higher yields. So this debt is expensive for banks. But as the pressure rises, we are likely to see a surge in issuance of riskier and presumably higher-yielding, and therefore costlier bank debt.

But France has figured out a way to pull a bag over investors’ heads with its newfangled class of bailinable debt – or rather a newfangled name for it.

France is home to four G-SIBs (twice as much as Germany and Italy combined): BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale. According to analysts at ABN Amro, the four banks have a total eligible capital shortfall of €50 billion, that will need filling by 2019:

Under our calculations, BNP Paribas currently has the largest shortfall, and it would require EUR 26 bn of eligible capital. The other three French banks also all have eligible capital shortfalls, albeit smaller… (EUR 24bn for the three other banks combined), approximately 1% of their risk weight assets.

To help fill some of those holes, financial engineers in France have kindly created a new debt class called senior non-preferred bonds (AKA senior junior, senior subordinated or Tier 3), which have been hastily accepted by France’s market regulators. Within days of the regulatory change Credit Agricole had issued €1.5 billion of the 10-year bonds. Société Générale is preparing its own five-year offering, and BNP Paribas is poised to follow.

It’s just the beginning. According to ABN Amro, there could be total funding capacity of as much as €93 billion for this new debt class. And that’s just in France. Spanish banks are also keen to begin issuing senior non-preferred debt; they’re just waiting for the regulatory authorities to make the necessary tweaks.

The new debt will be positioned in the hierarchy of creditors between subordinated debt and the pre-existing senior unsecured debt. Its holders will be subject to bail in before senior bondholders (who apparently won’t be bailed in at all) but after junior bondholders. The new class of senior non-preferred debt will apparently have 100% TLAC loss absorbing capacity eligibility for capitalization requirements, meaning that if a bank is resolved, holders of these instruments could lose much or all of their money.

So much for the “senior” half of the bond’s name. The senior non-preferred bond pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bailinable. As Bloomberg reports, while the debt is pretty  junior, it comes with pretty senior price tags:

Credit Agricole is only paying about 45 basis points more to issue senior non-preferred bonds than it would to sell traditional senior debt and about 65 basis points less than it would for subordinated.

That doesn’t look like a generous premium for a security that comes with its own mystery: how can investors consider a bond that can be bailed in as truly senior?

The answer is they can’t. But we have to admit that this is a beautiful name for a great scheme to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking. By Don Quijones, Raging Bull-Shit.

The European Court of Justice refused to listen and it ruled. Read…  Nightmare Before Christmas for Spanish Banks




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  24 comments for “France Comes up with a Real Jewel to Prop up its 4 TBTF Banks

  1. Konstantin KS
    Dec 23, 2016 at 12:49 am

    Defaultable debt…

    • polecat
      Dec 23, 2016 at 12:53 am

      Deplorable grift …

    • kevin
      Dec 24, 2016 at 4:25 am

      As usual, more newfangled Sesame-street-inspired acronymed products that are government-endorsed and regulatorily-complicit, financialized instruments to cream retail investors; who do not have the time or the inclination to read the font 10 footnotes on page 123 of the 880 page prospectus, nor the knowledge to comprehend it themselves, nor the wherewithal to hire whizbang quants to model the complexities for them, or expensive lawyers to defend their rights in the almost-certain event of eventual default. lol.

      • Meme Imfurst
        Dec 24, 2016 at 12:42 pm

        My gosh a perfectly constructed sentence. Such a rarity, congratulations on your education and your educators.

        AND…thoughts well put.

        • Tinky
          Dec 24, 2016 at 4:54 pm

          Surely this is sarcasm…

          “My gosh a perfectly constructed sentence.”

        • kevin
          Dec 25, 2016 at 11:37 am

          Well, Tinky…it was a test for folks like you. If you could not understand what the above extremely long “perfectly constructed” sentence was saying, then you probably would also not understand what those investment prospectus are saying, yeah?
          And yours truly am not being sarcastic here. lol.

  2. Mouseman
    Dec 23, 2016 at 1:23 am

    Detestable sham

  3. Ricardo
    Dec 23, 2016 at 3:07 am

    Destitute demons.

  4. d
    Dec 23, 2016 at 4:07 am

    Deleveraged by Bail-in.

  5. MC
    Dec 23, 2016 at 4:28 am

    As yesterday de-facto nationalization of MPS proved, bail-in’s are a joke on par with anti-trust agencies.
    According to what has been leaked out so far, there will be some losses to Tier 1 (junior) bonds, but these will be negligible, especially given the values MPS subordinate bonds have been trading since June.

    Why weren’t the bail-in clauses triggered? Simple: this is a “precautionary recapitalization”, and as such present EU/ECB legislation regarding bail-in’s does not apply. The small loss of value to already gutted junior bonds was apparently inserted at the ECB’s behest to pre-empt any formal complaint from Mr Kettle.

    Who will pay for this? The €20 billion needed for this “precautionary recapitalization” will come wholly from the issuance of new treasuries, meaning they will most likely end up on the ECB’s balance sheets sooner or later and after some horse trading. €20 billion don’t sound like much these days, when small startups are routinely valued in the ten digit territory, but they still are 1.2% of the projected 2017 Italian GDP, meaning Italy won’t be able to meet her GDP/debt targets for 2017.

    This begs the question of why the French banking system felt the need to invent these Tier 3 bonds: MPS will most likely become the pattern of bank nationalization throughout Europe and bondholders will take only a very modest hit, especially if values are allowed to drop to MPS levels.
    Perhaps insurance companies and other institutional investors throughout the EMU need those 40bps to stay afloat and this is merely a case of “I’ll buy yours if you buy mine”.

  6. Bruce Adlam
    Dec 23, 2016 at 4:54 am

    The sooner the break up of Europe the better it’s to corrupt and undemocratic. Why taxpayers keep putting up with bailing out the thieving banksters is beyond me at least the UK has the good sense to leave

    • nhz
      Dec 23, 2016 at 5:16 am

      good sense to leave? I believe it when I see it … I would not be surprised a bit if this popular vote is ignored by the EC and UK establishment just like all other voter decisions that they didn’t like. And I don’t think the UK is any less corrupt, maybe they are a bit better at playing the game than the clueless idiots in the European Commission.

      • Bruce Adlam
        Dec 23, 2016 at 6:10 am

        Maybe you are right but at least with the uk you get to vote .with the EU you don’t .why would you want to be a party to that

        • nhz
          Dec 23, 2016 at 12:59 pm

          … get to vote?

          The Dutch WERE allowed to vote about the EU Constitution and the EU Ukraine treaty and both were rejected. The EC simply ignored them. A few similar votes happened in other EU countries, only to be ignored when unfavorable to the EC bureaucrats (of course, in many EU countries people are not allowed to vote at all about EU matters and are simply assumed to be ‘in favor’ of whatever the EU decides).

          People in the EU are allowed to vote, if they really want to … The big question is, just like in the UK, if it will make any difference what they vote. It doesn’t look like that to me.

      • d
        Dec 23, 2016 at 7:01 am

        The UK is nowhere nears as corrupt as Club med and france, and has not been since the PROTESTANT REFORMATION

        Remember what they PROTESTANTS were PROTESTING about ???????????????.

        There has always been and always will be, a level of Crony corruption as there is power and money in close proximity. But in the UK compared to most other places the level is low. ( the immigrants from the Indian subcontinent are causing problems in this area as they are moving into the bureaucracy and bringing their bad habits with them.)

        “maybe they are a bit better at playing the game than the clueless idiots in the European Commission.”

        “The UK has some of the most devious and cunning Bureaucrats on the planet” (Senior German official (possibly Merkel Herself )) they regularly convince the electorate black is white.

        The difference is, they do this slowly, quietly, without publicizing their objectives.

        You don’t see Whitehall Officials standing up saying “We need more Whitehall”.

        But there is a little more Whitehall, every year.

        The Eu referendum was a disaster, as it was Orchestrated from the house, by the Politicians. If it had of been done by white hall, it would have been a landslide, for IN.

        If Whitehall was in charge of the EU, and had been since it was the EEC.

        Mainland Europe would now be a federated super-state, with an independent UK, having unrestricted free trade access to it.

        The Europeans would still be trying to figure out, how, and why, they voted to allow that to happen.

        • Maximus Minimus
          Dec 23, 2016 at 12:57 pm

          Very good insights which mirror my observations. I think, this goes back to the time of the empire. There is nothing boy scoutish about the British government, unlike that in Berlin.

  7. a.c.hall
    Dec 23, 2016 at 1:03 pm

    “Senior Unsecured Bonds”. Protected Species, Too Big to cover their Bad Bets. Leeches on the Taxpayer`s Behind.

  8. Chicken
    Dec 23, 2016 at 1:06 pm

    CoCo for coo-coo puffs! If you have managed to clap together some savings, these broke governments will find a way to steal it from you, come hook, crook or CoCo.

    For your own good and the good of your children, “We Control The Horizontal”

  9. walter map
    Dec 23, 2016 at 7:50 pm

    Vive la révolution. La révolution, c’est mort. C’est dommage.

    Pfft.

    • a.c.hall
      Dec 24, 2016 at 12:13 am

      first the Italian Banks go bust, now the French Banks go tits up. the EU has a market of 500 million Tax Payers, the second biggest, after China. How can you screw that up? the Southern European States PIIGS, their Economies are being Trashed by ECB/ Euro Big Banks Debt and Austerity. this keeps the value of the Euro down; making German Exports cheap. Germany joined the EU because the Deutschmark was pricing them out of World Markets. European living standards are being lowered to Subsidise the Germans.

      • nhz
        Dec 24, 2016 at 4:26 am

        totally wrong, they are not being lowered to “subsidize the Germans” at all!! The ones who are subsidized are primarily the elites in most of these EU countries, e.g. the German industrialists and the scum that rules in Clubmed. But also all the debtors, like countless Dutch and Spanish homeowners, French and Greek government pensioners with their oversized pensions etc.

        Just look up the data, e.g. Italian households are several times more wealthy than the average German household (difference is huge!). Many government employees in ‘poor’ Greece have higher incomes than factory workers in Germany. Incomes for 95% or so of Germans (or Dutch etc.) have gone nowhere after the crisis, only the 0.1% is profiting, just like in the US. Which makes sense, given that both parts of the globe are ruled by the same people who only care for their own tribe and their henchmen.

        And as to southern economies being trashed: yes, maybe some of those would do better (especially small companies) without the euro. But many ClubMed citizens would be FAR worse off without the euro, there would not be way over 100.000 Porsche cars in ‘poor’ Greece, countless luxury yachts etc. etc. . All bought with cheap credit from the North and that will never be paid for, just add it to the Target2 balance (= make the Germans, Dutch and Fins pay the bill). People in ClubMed lived the good life for many years without paying for it; now the bills are starting to arrive and unfortunately it is often others (mostly the middle class and savers) who get the bill for the excess.

        All these debtors and most of the ClubMed countries are totally bankrupt without the free financing from Northern Europe. There is zero chance that EU and national politicians will make the painful adjustments to make these economies competitive again, so the only possibility is waiting until the whole thing blows up and all the ridiculous ‘entitlements’ are erased :-(

        • d
          Dec 24, 2016 at 5:36 am

          france, greece, and the whole of club-med should never have been in the Euro.

          Or the north should never have been in a currency union with them.

          Take your pick.

          Either way the current currency union must become two, or implode.

        • Meme Imfurst
          Dec 24, 2016 at 12:58 pm

          One word: Goldman

          One question: WHY?

          One Answer: greed.

          If everyone is tired of the game, why do so many keep playing the tables when they know they will loose. If people are to tied to get off the floor, then they will be stepped on.

          As for France, well there was an old saying about not trusting the Turks, but I would not buy a used car from France. Can’t think of another country that has strived to conquer Europe over and over and fail over and over by using double crossing tactics over and over.

        • micromacroman
          Dec 26, 2016 at 8:31 pm

          You are so right. This whole EU thing reminds me of the original American Confederation of states before the Constitution system. Even the “colonies” recognized that it would be a failure. Either go all in with a constitutional republic of europe. Or go home. Biggest fault with EU is NATO. America subsidizing EU defense may go out the window with Trump. That is the biggest glaring weakness of EU to me. Why a “nation” of 500million people depending upon a nation of 320million to subsidize their national defense ? And why is a nation of 320million putting up with it after 71yrs ? Is this why all the liberal/socialist play the “Russian/Boogeyman” card ? So they can keep the obviously corrupt system alive ?

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