Kames Capital sounds warning over banking stability plan

Bank1Increasing debt levels among banks may have the opposite effect to making them more stable – and investment funds will carry the burden if the banks fail, a fixed income manager has warned.

Gregory Turnbull-Schwartz, at Kames Capital, says the “huge sums” the banks are being forced to raise by regulators increases overall risks.

Making matters worse, he says that ratings agencies are rewarding banks for issuing more subordinated debt as the banks use this route to meet the regulatory-set increase of their ‘total loss absorbing capital’ (TLAC).

“We agree that holding more capital is in general a sound objective. The problem is that debt, regardless of how many bells and whistles it has, is still debt, not capital,” said Turnbull-Schwartz, and he quotes a Financial Times figure of €1.1 trillion that the banks will need to raise.

He added that a consequence of the increase of “so-called capital” is that the debt has increasing complexity, both across jurisdictions and institutions. This is because the implementation of regulation is via legislation, and each country addresses that in its own fashion, and there is an increasing number of types of bank bonds in the market.

At a time when many appear concerned about market liquidity, he said, anything that further fragments the market is a potential risk factor. So while there isn’t real capital being raised, there is real market liquidity being eroded.

“We would ask then whether this new debt will actually succeed in making banks more robust. Will banks with more subordinated debt manage to avoid a crisis more successfully than banks with less of it? It is unclear, and even if one were to agree with the unproven view that it would work, it still leaves the burning question of who actually holds this new debt and therefore takes the loss,” he says.

“More than likely it will be bought by investment funds in which we all have collectively invested our pension and savings, and it will be those funds which suffer in the event of any future losses.”

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