Date
17 December 2017
Spanish bank Bankia, bailed out by the government in 2012, was embroiled in the mis-selling of preference shares. Photo: Bloomberg
Spanish bank Bankia, bailed out by the government in 2012, was embroiled in the mis-selling of preference shares. Photo: Bloomberg

Europe banks face debt sale clampdown

European regulators are clamping down on the sale of debt by banks to their own retail customers who may not realise the risks posed by such assets, the Financial Times reported Monday.

The European Banking Authority (EBA) is concerned about such debt that could be bailed in (converted into equity) if the bank faced bankruptcy or its capital became inadequate.

Banks have been selling increasing amounts of debt in the past several months in an attempt to strengthen their capital base.

EBA wants to ensure that lenders do not target investors without making them aware of the hazards of debt that is not protected by deposit guarantees, the report said.

Analysts say that complex instruments such as contingent convertible bonds – which convert to equity when a certain threshold is reached – are not being sold to retail investors but regulators are keen to avoid the mis-selling scandals that have plagued Europe’s financial sector in recent years.

EBA is considering issuing a public warning to customers about the perils of certain types of bank debt, the report said, citing sources.

It could also set guidelines or obtain a mandate from the European Commission to take further action. Possible next steps cold include banning the promotion of certain products to retail customers, demanding upfront disclosures of the lack of deposit protection, or requiring individuals to sign declarations that they are aware deposit guarantees do not cover their investments.

The perils of retail ownership of bank debt were exposed by the preference share mis-selling scandal involving Bankia, the Spanish bank rescued by the government in Madrid in 2012. Retail investors were forced to take losses on preference shares they bought without knowing the risks involved, which prompted a wave of litigation.

Other banks in southern Europe have been the subject of lawsuits, including Banca Popolare di Milano, which was hit by a class action by retail customers for an issue of convertible notes. The Italian bank settled the action, making a provision of €47m.

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