MNI INSIGHT: Bank Of Spain Relieved by MREL Extension

By Silvia Marchetti

     ROME(MNI) - The Bank of Spain is pleased new EU regulation will allow its

banks more time to accumulate minimum levels of debt and equity that can be

written off or bailed in to cover losses, as smaller institutions throughout

Europe struggle with the requirements, MNI understands.

     The latest version of the Bank Recovery and Resolution Directive (BRRD 2)

would give banks until 2024 to reach the new minimum requirement for own funds

and eligible liabilities (MREL), granting Spanish lenders a breathing space at a

time when their profits still lag their cost of capital and the Bank of Spain is

pushing them to boost capital ratios.

     Supervisors fear retail-oriented mid- and small-size European banks in

general may face challenges meeting the MREL rules, MNI understands.

Loss-absorbing securities such as additional Tier-1 bonds, Tier-2 supplementary

capital, and senior non-preferred bonds come at a greater cost to issuers, as

investors demand higher interest rates to compensate for the risk of write-down

     Spanish banks' average CET1 ratio was 11.75% of risk-weighted assets at the

end of the third quarter, the lowest in the eurozone, according to ECB data,

while their return on equity was negative as recently as 2017.

     While Spanish banks argue that their retail business model is low risk,

allowing them to hold less capital than their international peers, Bank of Spain

Governor Pablo Hernandez de Cos has publicly called on them to raise more.

     Spain's banks have recovered since a European Union bailout in 2012, but

supervisors are still concerned by relatively high levels of non-performing

loans, which increase their vulnerability to future downturns and tend to weaken

credit flows to the real economy.

     NPLs have dropped by over E114 billion from their 2013 peak, and the Bank

of Spain expects disposals of bad loan portfolios to pick up pace in 2019. The

NPL ratio could fall to 4% of total loans by 2020, not including disposals,

according to Bank of Spain calculations.

     Spanish banks' NPL coverage ratios comply with new ECB rules on prudential

provisioning of exposures.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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