The short report, part of Scope Ratings’ “Q&A for the Thoughtful Bank Investor” series, aims to address some of the investor uncertainties related to European banks’ issuance of MREL/TLAC-eligible senior unsecured debt. Key among these is whether such debt would rank equidistant from preferred senior (not eligible for MREL/TLAC) and Tier 2.

Scope notes that this debt class can take different names: non-preferred senior (France), senior with statutory subordination (Germany), with contractual subordination (other jurisdictions, such as Spain), or senior issued at the holding company level (when applicable). “It is important to remember that, whatever their name or issuance entity (holding company or operating bank), all these categories of MREL/TLAC-eligible senior debt ceteris paribus define the same risk for investors” notes Sam Theodore, Scope bank analyst and author of the report.

The agency’s view is that MREL/TLAC-eligible senior debt (non-preferred senior and equivalents) is not equidistant from senior preferred and Tier 2. As long as the issuing bank is not in resolution, non-preferred senior would experience no hick-ups, in sync with the preferred senior. On the other hand, Tier 2 securities could plausibly be converted to equity (at a dismal moment to become an equity investor) or written down at the request of the bank’s supervisors, as part of the early intervention mechanism. The latter would precede the placing into resolution of a financially distressed large bank, and possibly recapitalise it without the need of resolution.

Scope expressed its belief that placing in resolution of a large EU bank, although fully codified by regulations (e.g. BRRD), is likely to be a highly extreme scenario – which to date has not happened, even with banks in material distress. First, the supervisory authorities would do everything in their powers – which are substantial – to avoid resolution, as this would be plausibly viewed by some politicians and segments of the public opinion as proof of their inability to handle a difficult situation on their own. Second, national politics could also play a role: the finer details of the bail-in sequence – debt investors are bailed in first, depositors much later, if at all – could be lost in a heated political argumentation.

Scope’s report is titled “Non-Preferred Senior Debt Is Not Equidistant from Preferred Senior and Tier 2” and is available at www.scoperatings.com.