| 11.7°C Dublin

Relaxed EU aid rules will shield bondholders

Close

A trader wears a face mask on the floor of the New York Stock Exchange (NYSE) following traders testing positive for Coronavirus disease (COVID-19), in New York

A trader wears a face mask on the floor of the New York Stock Exchange (NYSE) following traders testing positive for Coronavirus disease (COVID-19), in New York

REUTERS

A trader wears a face mask on the floor of the New York Stock Exchange (NYSE) following traders testing positive for Coronavirus disease (COVID-19), in New York

Junior bondholders and bank shareholders won't be burned if governments have to put capital into banks, despite post-crash rules setting out how losses should fall.

Rating agency Fitch says shareholders and subordinated debt holders will be protected under an EU relaxation of state aid rules for the duration of the coronavirus outbreak.

Aid granted to banks by EU member states to compensate for direct damage suffered as a result of coronavirus will not qualify as extraordinary public financial support under a temporary EU state aid framework adopted this month, Fitch said.

The temporary communication also confirmed that any coronavirus-related bank support packages qualifying as 'precautionary' support under article 32(4)(d) of the Bank Recovery and Resolution Directive (BRRD), will not require the bail-in of shareholders and subordinated creditors.

That means mechanisms put in place after the crash - to ensure private sector investors absorb losses before taxpayers do - are in effect parked until the current crisis passes.

Fitch analysts said they do not view the decision as a full bail-out mechanism for banks.

The measure does not apply to direct hits to banks' revenues from lower volumes of new business due to the crisis, or damage to capital positions due to losses incurred prior to end-2019.

Meanwhile in a separate report, Arif Bekiroglu, senior analyst at the Moody's rating agency says actions by banks and regulators allowing greater flexibility to borrowers will also benefit lenders.

Payments breaks proposed by the Central Bank for customers affected by coronavirus will support the livelihood of borrowers and moderate the banks' loan-loss provisioning cost as well, Moody's said.

"Even though banks will lose some interest income, if it prevents foreclosures or other forbearance measures this may be a cheaper option for banks."

The three-month window could delay reclassification of loans with payment breaks to "stage two" (underperforming) and "stage three (credit impaired), which would otherwise cause banks to make higher allowances for losses - hitting lenders' profitability.

Irish Independent