THE UK market regulator, in consultation with the European Commission, has blocked Royal Bank of Scotland (RBS) from using state aid to repay holders of the bank’s low-ranked debt, setting a precedent that could have implications for Irish banks.
RBS, the parent of Ulster Bank which is 70 per cent owned by the UK government, said yesterday that it would not exercise options to redeem more than $1.5 million (€1 million) of subordinated bonds next month.
The UK’s Financial Services Authority told RBS not to exercise a “call option” on four securities after the commission ruled on August 19th that banks should not use taxpayers’ money to repay equity and subordinated debt.
The decision is seen as an effort by regulators and policymakers to try to ensure that investors bear some of the cost of bailing out troubled banks.
It also raises the question as to whether the European Commission could take similar decisions in relation to the Irish banks that have not been nationalised. The commission recently required Anglo Irish Bank, nationalised in January, to defer coupon (interest) payments on tier-one bonds as a condition of the State’s recapitalisation of the bank.
“It is possible that if the Irish Government did end up providing further capital , they may not be able to call [redeem] some of these instruments, particularly for lower tier two debt,” Anna Lalor, banking analysts with Goodbody Stockbroker said yesterday. She noted this possibility was already built into the price of many of these instruments, to a certain extent.
A large amount of subordinated debt has already been bought back by the Irish banks at a significant discounts in recent months.
In his address to the Oireachtas Joint Committee on Finance on Monday, Minister for Finance Brian Lenihan said that “the bulk of bonds in issue by Irish banks are not subordinated debt”, but instead are ordinary senior debt bonds, which are lower risk as they take precedence over other debt securities.
The Minister went on to point out that these senior bondholders were guaranteed under the Government guarantee scheme and said that “any suggestion that those parties should be invited to consider a reduction in the amount repayable to them would have catastrophic effects for the banking system and the funding of the Irish State”. – (Additional reporting; Reuters, Bloomberg)
