30 October 2024

FT: Everyone hates the SEC’s bank bail-in take

A year ago FT Alphaville wrote about the Financial Stability Board’s Credit Suisse postmortem, and its almost-casual observation that the SEC believed the entire post-GFC global bank bail-in bonds regime might fall foul of US securities law.

In the US the conversion of debt into equity counts as a new sale of securities, and therefore requires full registration — with new disclosures etc — or a regulatory exemption. Astonishingly, it appears the SEC feels that even bonds expressly designed to fit regulatory requirements by being convertible into equity are not exempt. The rigmarole of re-registering can be difficult-to-impossible in a shitshow fast-moving banking crisis, but failure to do so might be a breach of federal securities law, according to the SEC. Which is, even in this day and age, broadly considered A Very Bad Thing. 

Compounding the issue is the extraordinary extraterritorial reach of US law. In theory you don’t even need to issue a bond in the US to fall foul of it — just a few US investors among the holders might be enough. Here’s what we wrote, while gently rocking backwards and forwards: The occasionally conflicting regulatory approaches of the US and Europe is a fun/frustrating fact of life in finance — viz Mifid II.

But this looks like next-level headbanger stuff. Having easily ‘bail-in-able’ bonds to bolster the total loss absorbing capital of a struggling bank is a cornerstone of the entire global post-financial crisis regulatory edifice! This stuff has been debated ad nauseam for over a decade! The FSB even mandates that at least 33 per cent of a global systemically important bank’s TLAC should be in debt! We gather that quite a few people were as alarmed as we were, but the wheels of cross-border bank resolution regulation grind slowly. As far as we know, nothing concrete has happened with the awkward issue of how loss-absorbing bonds collide with the US legal system....

more at FT

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