ICB helps push UK bank debt costs higher

UK BANKS have seen the cost of their debt jump following the release of the final report from the Independent Commission on Banking (ICB).

Despite escaping the worst of the sell-off in European bank stocks yesterday, Britain’s lenders saw the yields on their long-term bonds rise after the ICB said that around a fifth of their debt-holders should accept losses if the bank collapses.

As of noon yesterday, data from Markit for the banks’ most liquid debt showed that yields for bonds maturing in 2024 had risen from 7.2 per cent to 7.4 per cent for Lloyds, from 7.47 per cent to 7.69 per cent for RBS and from 5.08 per cent to 5.11 per cent for HSBC since Friday. Barclays saw the rate on its bonds maturing in 2021 rising from 8.67 per cent to 8.88 per cent.

More broadly, markets are fleeing European lenders, sending the cost of insuring their debt to three-year highs for swathes of the region’s biggest banks (see chart right).

UK debt investors’ fears were also stoked by the ICB’s emphasis on the introduction of bail-in bonds, which will see bondholders take losses rather than be bailed out by taxpayers if a bank gets into trouble.

Markets are particularly concerned over whether the bonds would be converted into equity like a contingent convertible bond (coco) in the event of a bank collapse or whether they will be written off completely.

Bank of America Merrill Lynch’s Daniel Bell said: “There will be a market for cocos, but what the commission means by bail-in bonds is not clear – if it’s senior debt that converts into equity, there will be a market for that. But if it’s senior debt that is written off, that’s quite different.”

The ICB and others argue that bondholders must take on the full risk of investing in banks rather than relying on the prop of taxpayer support, but the changeover is likely to involve significant costs.