Markets may find it hard to absorb wave of bank debt: EU watchdog

© Reuters. Markets may find it hard to absorb wave of bank debt: EU watchdog© Reuters. Markets may find it hard to absorb wave of bank debt: EU watchdog

LONDON (Reuters) – It may be hard for markets to absorb debt worth up to 276 billion euros ($ 293 billion) that banks in the European Union must issue to comply with rules aimed at shielding taxpayers from bailouts, the bloc’s banking watchdog said on Wednesday.

The European Banking Authority (EBA) said regulators will have to give some lenders enough time, given the strain on markets from raising such amounts of debt.

The debt is known as MREL and can be written down to replenish burnt through capital if the lender collapses, thus avoiding governments having to pick up the tab as they did during the 2007-09 financial crisis.

“Market capacity is uncertain and, at this stage, its potential evolution cannot be adequately assessed,” the EBA said in a statement.

The watchdog estimated the financing needs of 133 banking groups at 186 billion euros to 276 billion euros to absorb losses in a crisis, lower than previous estimates.

Some of the MREL requirement can be met by rolling over existing bank debt in a form that complies with the new rules.

The biggest banks and many of the second tier lenders should be able to access markets and issue debt that complies with the new rules, but smaller lenders currently have limited or no access to liquid international markets, the watchdog said.

“MREL will not be met overnight but built up over appropriate transitional periods determined on a case by case basis,” the EBA said.

“This should help to mitigate this challenge as banks will be given more time to comply with the MREL requirement.”

The very biggest banks will have to being building up their MREL buffer from 2019 as they also come under a similar, global set of rules. The EBA has set no deadline for the region’s other banks, leaving it up to regulators.

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