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Is It Worth Anything?

01 November 2016 by lberuti

Some of the market focus was back on financials over the last few sessions. But for once, it was not the result of some US Department of Justice fine related headline. The talks centered around UK banks and effectiveness going forward of CDS referencing OpCo senior debt to protect investors in case of bail in. The UK regulator has articulated “Single Point of Entry” as the preferred resolution strategy. Under this approach, the loss absorbing capacity has to be concentrated at the resolution entity, which in this case is the HoldCo. Indeed, especially for large systemically important banks, there is a huge volume of “excluded liabilities” (deposits, derivatives portfolios, …) which rank pari passu with the senior debt of OpCo entities, therefore giving rise to high litigation risk and removing the required legal certainty for the resolution action undertaken. That is also the reason why UK banks are required to issue HoldCo senior debt to meet their TLAC obligations. Hence the point of some analysts who argue that buying protection on OpCo UK banks senior debt is next to useless on the basis that any government intervention would be focused on the HoldCo senior debt.