Dutch law on banks’ junior senior debt Is credit positive
On 14 December, the Dutch Parliament and Senate passed a bill that implements the European Union’s (EU) Directive 2017/2399 creating a new category of bank debt called senior non-preferred (which we call junior senior debt) in banks’ liability structure. The newly created instruments are subordinated to senior unsecured debt, but senior to Tier 2 notes, which gives banks the ability to issue a new bail-in-able debt instrument. The creation of a new debt instrument is credit positive for Dutch banks because it will provide greater protection from losses in a resolution. Under the Dutch law, junior senior notes are bail-in-able in a resolution and therefore eligible in Dutch banks’ resolution buffers, the so-called minimum requirement for eligible liabilities and own funds (MREL) as defined in Article 45 of the EU Bank Recovery and Resolution Directive (BRRD). These notes must have a minimum original maturity of one year, and their prospectuses must explicitly refer to their junior senior status in accordance with Directive 2017/2399 requirements. The new instrument will make it easier for Dutch banks to meet MREL requirements, which will reduce potential losses for senior creditors. MREL targets have been defined by EU resolution authorities for each bank individually. As of June 2018, the four major Dutch banks reported MREL requirements (which already apply to them) of 29% of risk-weighted assets (RWAs) for ING Bank N.V. (Aa3/Aa3 stable, baa11 ); 31.6% of RWAs for ABN AMRO Bank N.V. (A1/A1 stable, baa1); 31% of RWAs for Rabobank (Aa3/Aa3 stable, a3); and 8% of total liabilities and own funds (corresponding to approximately 52% of RWAs) for De Volksbank N.V. (A3/A3 stable, baa1). These targets can be met with regulatory capital, junior senior debt and, to a limited extent, eligible senior debt. Based on these data, we estimate that Dutch banks will need to issue up to €14 billion of junior senior debt to meet their MREL requirements should they decide to not include any eligible senior debt in their resolution buffer (see exhibit). Rabobank will have to issue the largest amount, and in August and September 2018 issued €2.1 billion worth of senior debt that automatically converted into junior senior notes on 14 December 2018, the date upon which the law took effect. ING’s MREL requirements will not be met through the issuance of junior senior notes, but rather with senior debt issued by the holding company and which are structurally subordinate to the bank’s senior unsecured debt
On 14 December, the Dutch Parliament and Senate passed a bill that implements the European Union’s (EU) Directive 2017/2399 creating a new category of bank debt called senior non-preferred (which we call junior senior debt) in banks’ liability structure. The newly created instruments are subordinated to senior unsecured debt, but senior to Tier 2 notes, which gives banks the ability to issue a new bail-in-able debt instrument. The creation of a new debt instrument is credit positive for Dutch banks because it will provide greater protection from losses in a resolution. Under the Dutch law, junior senior notes are bail-in-able in a resolution and therefore eligible in Dutch banks’ resolution buffers, the so-called minimum requirement for eligible liabilities and own funds (MREL) as defined in Article 45 of the EU Bank Recovery and Resolution Directive (BRRD). These notes must have a minimum original maturity of one year, and their prospectuses must explicitly refer to their junior senior status in accordance with Directive 2017/2399 requirements. The new instrument will make it easier for Dutch banks to meet MREL requirements, which will reduce potential losses for senior creditors. MREL targets have been defined by EU resolution authorities for each bank individually. As of June 2018, the four major Dutch banks reported MREL requirements (which already apply to them) of 29% of risk-weighted assets (RWAs) for ING Bank N.V. (Aa3/Aa3 stable, baa11 ); 31.6% of RWAs for ABN AMRO Bank N.V. (A1/A1 stable, baa1); 31% of RWAs for Rabobank (Aa3/Aa3 stable, a3); and 8% of total liabilities and own funds (corresponding to approximately 52% of RWAs) for De Volksbank N.V. (A3/A3 stable, baa1). These targets can be met with regulatory capital, junior senior debt and, to a limited extent, eligible senior debt. Based on these data, we estimate that Dutch banks will need to issue up to €14 billion of junior senior debt to meet their MREL requirements should they decide to not include any eligible senior debt in their resolution buffer (see exhibit). Rabobank will have to issue the largest amount, and in August and September 2018 issued €2.1 billion worth of senior debt that automatically converted into junior senior notes on 14 December 2018, the date upon which the law took effect. ING’s MREL requirements will not be met through the issuance of junior senior notes, but rather with senior debt issued by the holding company and which are structurally subordinate to the bank’s senior unsecured debt
