"Overseas, we are seeing a market gradually developing for so-called 'senior nonpreferred debt'."
Increasing levels of banking regulation and more stringent capital demands from regulators will push banks to seek funding from the capital markets. Dr Andrew Caruana Scicluna of Camilleri Preziosi thinks that this will bring a raft of Maltese banks to the market, both locally and overseas.
The 2008 financial crisis triggered a major overhaul in the regulatory architecture applicable to banks, which continues to evolve until today. "Due to more stringent capital requirements, banks have a thirst for capital. Enhanced capital requirements are driving many local credit institutions to tap the local market, and the trend, it seems, will continue. I would not be surprised if we see more banks coming to the market to strengthen their capital bases," Dr Andrew Caruana Scicluna said.
Banks are required to hold certain levels of 'own funds' and 'eligible liabilities', Dr Caruana Scicluna explained:
"The Maltese market has become accustomed to tier 2 issuances and, to an extent, tier 1 issuances too, under the guise of subordinated bond issuances and rights issues, respectively."
A second iteration of the Bank Recovery and Resolution Directive (BRRD) has recently been adopted, which will oblige banks to maintain amounts of so-called 'eligible liabilities' that must satisfy the conditions set out, among others, in the BRRD, as transposed locally, and the Capital Requirements Regulation.
"This is interesting," Dr Caruana Scicluna said. "Banks do not appear to have resorted to the capital markets locally as yet in order to address the changed banking regulatory landscape emanating from, among others, BRRD II. However, I think it is just a matter of time before we see banks coming to the market to issue new instruments to satisfy their minimum requirements for own funds and eligible liabilities (MREL).
"Overseas, we are seeing a market gradually developing for so-called 'senior non-preferred debt'. It remains to be seen whether this trend will reach our shores. However, given the complex nature of these instruments, owing to their intrinsic regulatory features, selling these instruments to the retail public in Malta may be cumbersome and costly since suitability testing is likely to be required to be carried out by financial intermediaries. This is a space to watch. I think there will be interesting developments in the near future."
Originally published by Malta Stock Exchange Business Review.
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