Here’s a nasty looking headline from FT’s 6am cut this morning (which is now paywalled, btw) - European bank bail-ins will cost +87 basis points. The article summarizes the results of a JP Morgan survey on the effect of various “bail-in” options. Here’s JPM’s summary:
Survey responses indicated that the implementation of bail-in frameworks is likely to have a material impact on the pricing of senior debt. Firstly, respondents indicated that the greater loss outcomes associated with bail-in regimes are not being priced in, despite the existence of special resolution regimes which already may imply similar loss outcomes for senior bondholders. Secondly, the average risk premium that investors would demand for a single ‘A’ bank under a bail-in regime would be 87bp. Thirdly, investors clearly expect that the implementation of a bail-in framework will lead to an increase in price differentials across issuers of differing credit quality. In our opinion, the sum total of the implementation bail-in regimes together with the current extensive regulatory capital reform process could be a major driver of M&A activity amongst the European banking sector, as smaller and lower ratings issuers may struggle to access capital markets at levels which allows their business models to remain intact.
Yikes.
