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* National frameworks to dictate amount of TLAC debt needed
* Pricing of new instruments still in question
* New wave of liability management expected
By Helene Durand
LONDON, Nov 13 (IFR) - The Financial Stability Board set outa new bank capital regime designed to end the problem oftoo-big-to-fail banks this week. But market participants wereunanimous in saying that national frameworks would be key indetermining how much Total Loss Absorbing Capacity (TLAC) debtwill need to be raised and where it will price.
The much-anticipated term-sheet laid out the reforms thatwill see the world's biggest lenders raise the equivalent of 18%of their risk-weighted assets in so-called TLAC debt by 2022.
While the numbers seemed scary at first - with the FSBsaying that banks globally would have to raise 1.1trn of newTLAC debt - they were taken calmly by market participants.
"I would take the quantum of TLAC debt that banks need toraise with a massive pinch of salt," said Laurent Frings,co-head of EMEA credit research at Aberdeen Asset Management.
"The big delta is what countries will do in terms of theirinsolvency regimes, which can change those numbers dramatically.While we have a better understanding of what the UK, Germany andItaly will do, the big question is around the French banks, inparticular BNP Paribas, and what will happen there."
When the first TLAC term-sheet came out at the end ofNovember 2014, there were concerns that banks, particularly inEurope, would struggle to raise the billions of dollars of newdebt needed to meet the requirements.
However, changing legal frameworks over the course of 2015in countries like Germany, which subordinates senior bonds toother senior liabilities, has meant that a lot of the supplyfears have now receded, especially if countries like Francefollow the same path.
"The implementation time frame and ability for issuers touse senior debt to fulfil the requirements as well as thenatural roll-off of debt that will be replaced to beTLAC-eligible over time means that the needs will bemanageable," said Gregory Turnbull-Schwartz, investment manager,fixed income, at Kames Capital.
Wells Fargo, BNP Paribas and HSBC are among the Westernbanks with the biggest shortfalls, with various analystsestimating they will need to sell US$44bn, 49.5bn and 55bn ofTLAC debt respectively.
According to Axiom Investment Management, French banks' TLACneeds would drop from 133bn if no senior debt was used to lessthan 5bn if France was to follow the German solution.
MOVING TARGETS
While the supply numbers appear manageable, how to price thevarious layers of debt that will emerge from the new TLACrequirements is far from clear.
"It will take months for pricing to bed down, and itcertainly won't be figured out before Christmas," said SimonMcGeary, head of European new products at Citigroup.
"Banks are in transition right now so it's difficult to knowwhat the thickness of their capital layers will be and howvarious instruments are priced will be dependent on that."
UK and Swiss banks have been active recently, raising seniorand subordinated debt at the holding company level - and settinguseful pricing points for the market - but the targets are stillmoving for issuers.
"Senior holding company debt is still difficult for banks toissue," said Frings.
"The differential between opco and holdco senior is around50bp right now but that number can be quite volatile. We saw itwith Credit Suisse when they had to pull a deal - you need theright window and sentiment to get these trades done."
Banks will also have to work that little bit harder to findinvestors, which could in turn impact pricing dynamics, giventhat global regulators want to make it more punitive forso-called global systemically important banks to buy otherbanks' TLAC paper.
"For any GSIB investing in TLAC-compliant paper, they wouldhave to deduct that from their Tier 2 capital which potentiallyreduces the size of the investor base," said a DCM banker.
While banks do not buy as much of each other's paper as theyused to, they still make up a reasonable proportion of thedistribution. For instance, banks bought 11% of UBS's inauguralholdco senior bond that was sold this week.
LIABILITY MANAGEMENT WAVE
While most of the content of the FSB paper had been leakedahead of the announcement, one element, which negatively impactsbanks in the UK in particular, was not.
McGeary said the FSB's requirement for banks to have capitalinstruments only at the resolution entity - essentially theholding company level - from 2022 would encourage banks to moveall their external capital to that part of the bank.
This could trigger a new wave of liability managementexercises. For example, Barclays said in its third-quarterpresentation that £19bn of Additional Tier 1 and Tier 2 was atthe opco level.
"Liability management will be an important tool for banksand I would expect a big wave of exercises as banks migratetheir opco capital stack to the holdco," said a structuringspecialist.
"While some of the transition can happen organically, thereisn't quite enough runway for all of it to happen that way andliability management will help accelerate the transition." (Reporting by Helene Durand, editing by Matthew Davies andJulian Baker)
