Open Category List

We have been asked our view on potential and timing for CET1 easing going towards 2020 and if yes what might be the implication for the funds

  • Home
  • /
  • January 2020
  • /
  • We have been asked our view on potential and timing for CET1 easing going towards 2020 and if yes what might be the implication for the funds

Context:Regulatory changes are on-going and Pillar 2 Requirement that for European Banks must be met only with equity (i.e. CET1), will going forward be met with CET1, AT1 cocos and Tier 2. While this creates a on-off capital relief for European banks of ca. 90bps, this doesn’t change the trend of more capital and further de-levering, which is very supportive for subordinated debt holders.

Impact for the fund:No impact as this would be more an equity story

If related to Pillar 2 Requirement (P2R): Yes, this creates a capital relief Andrea Enria of the ECB Banking Supervision or SSM has been very clear on that:
https://www.bankingsupervision.europa.eu/press/speeches/date/2019/html/ssm.sp191212~10d96807c3.en.html
“When considering the impact of Basel III, we should also consider recent legislative changes that will lead to more lenient requirements. For instance, the Capital Requirements Directive V contains new rules on the quality of capital for Pillar 2 requirements, which will impose a change in the policy the ECB has pursued until now – that of focusing only on Common Equity Tier 1, or CET1 for short. When this change was being negotiated, ECB Banking Supervision and the European Parliament voiced their concern about this change, warning that high quality capital was essential. According to our calculations, the change will generate an average reduction in CET1 requirements of 90 basis points, as banks will be able to rely on lower quality additional Tier 1 and Tier 2 capital, which is now available at favourable conditions.”

What is the SSM saying: Pillar 2 Requirement (P2R) that until now had to bet met only with equity or CET1 can, with the upcoming redefinition of P2R under Capital Requirement Directive 5 (CRD5), be met with a split of equity and sub-debt i.e. 56% CET1, 19% AT1 and 25% T2. This will create a capital easing of ca. 90bps or ca. EUR 30-40bn.

Timing should be around JAN22, earliest.

Looking at the bigger picture: this is not really an easing. Namely, implementation of revised-Basel III (so-called Basel IV) should start to kick in in 2022 too, which will lead to a gradual increase in risk-weighted-assets, offsetting this one off and up-front boost in excess capital. Another element to take into account is that banks will not be able to double count their CET1 between P2R and P2G (Pillar 2 Guidance).

If so, what is the potential implication for AT1/ T2 performance, and in turn, their fund performance

This is more an equity story (on margin positive) and is neutral for bond holders. We expect the performance of the fund to be strong, independent of impact of the revision of P2R, as indicated by our base case of +9% for the year. Additional info can be found in the Jan Spotlight that will be attached to the monthly comment

  • Please read this important legal information before proceeding.

    Information contained herein are solely for the use of the person who has accessed this information and may not be reproduced or distributed, even partially, to any other person or entity.

    The material contained herein is confidential and intended solely for the use of the persons or entities with nationality of or respectively with their residence, domicile, registered office or effective administration in a State or Country in which distribution, publication, making available or use of the information is not contrary to applicable laws or any other regulation.

    The material contained herein is aimed at sophisticated, professional, eligible, institutional and/or qualified investors/intermediaries who have the knowledge and financial sophistication to understand and bear the risks associated with the investments described.

    The information is solely product-related and does not take into account any personal circumstances and does not qualify as general or personal investment recommendation or advice. In particular, the information is given by way of information only and does not constitute a specific legal offer for the purchase or sale of financial instruments. Moreover, nothing contained herein is constitutive of any tax advice.

    Every effort has been made to ensure the accuracy of the financial information herein but the information contained herein has not been independently reviewed or verified. Therefore, Atlanticomnium SA gives no assurance, express or implied, as to whether such information is accurate, true or complete and no responsibility is accepted by Atlanticomnium SA for any errors or omissions. Third-party content is the property of its respective provider or its licensor and is protected by applicable copyright law.

    Past performance is not indicative of future performance. The price of shares/units and the income from the funds/trusts can go down as well as up and may be affected by changes in rates of exchange or financial markets fluctuation, out of the scope of Atlanticomnium SA.

    To the fullest extent permitted by law, in no event shall Atlanticomnium SA or our affiliates, or any of our directors, employees, contractors, service providers or agents have any liability whatsoever to any person for any direct or indirect loss, liability, cost, claim, expense or damage of any kind, whether in contract or in tort, including negligence, or otherwise, arising out of or related to the use of the information provided.