LONDON (Reuters Breakingviews) - There’s a glimmer of light at the end of the tunnel for European banks’ glum investors. Ultra-easy monetary policy is here to stay for a while but UniCredit’s latest buyback plans point to the benefits of some new regulatory wiggle room.
UniCredit boss Jean Pierre Mustier said on Tuesday he would return 8 billion euros to shareholders over four years. That sounded punchy given tough regulation, low growth and sub-zero interest rates. Yet he is being helped by an obscure European Union capital rule known as Article 104a, which the bank namechecked.
Not everyone is fan of a rule that allows banks to use cheaper hybrid debt to comply with capital requirements. It applies particularly to the so-called pillar 2 bucket, an extra buffer that regulators determine on a case-by-case basis and which is designed to cover bank-specific risks, such as rogue traders. The former head of the regulator of euro zone banks, Daniele Nouy, has argued that only common equity should be used for pillar 2 to ensure banks can truly weather crises. Nouy has retired, but other European Central Bank supervisors share her view.
The article has yet to be passed into law by individual countries. Nouy’s stance therefore raised the risk that national lawmakers or regulators might impose a higher standard. Yet if UniCredit’s explicit reference to Article 104a is any guide, banks can breathe easy.
That would make a big difference. The more hybrid debt that lenders can use to meet capital requirements, the less common equity they need and the healthier their current buffers appear. UniCredit says Article 104a would boost its common equity surplus by as much as 80 basis points. That would help offset tougher capital requirements for trading exposures, among other things.
There’s a case for taking it easy. Hybrid debt is less permanent than equity but can still absorb losses, for example by deferring coupons. And shareholders need a little help. Euro zone banks’ profitability has been eroded by weak growth and ultra-loose central bank policy. The EURO STOXX Banks index is trading at just 60% of tangible book value, according to Refinitiv data. If regulators want shareholders to support European banks, they need to give them something to be happy about.
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