By Francesco Guarascio
BRUSSELS (Reuters) - Euro zone regulators said on Wednesday they will impose binding targets on most of the bloc's largest banks forcing them to raise their capital buffers within a maximum of four years, a move that could increase lenders' funding costs.
To meet their targets, banks will also have to issue a minimum amount of debt that is easy to write down, while debt issued under British law might need to be replaced after Brexit with fresh capital - both conditions that are expected to further raise banking costs.
The Single Resolution Board, the EU body that decides banks' capital buffers, known as MREL, said it will set for the first time "binding targets for the majority of the largest and most complex banking groups" in the euro zone. The targets will need to be met in four years at the latest, it added, confirming what Reuters reported on Tuesday.
Under new rules meant to reduce taxpayers' costs in a banking crisis, euro zone banks have been advised since last year to issue a sufficient amount of debt that would be written down to absorb losses if they fail. Now for some lenders, those recommendations will become binding.
The SRB, which has the power of disposing of failing banks, did not disclose the names nor the number of the lenders that will be subject to the binding requirements, but a person familiar with the work of the institution told Reuters the decision concerned 35-40 banks.
The actual amount of additional capital to be set aside will be decided for each involved bank in the coming weeks and months, officials said.
But the SRB estimated a shortfall of 117 billion euros (£103.8 billion) for a sample of 76 banks. Last year it said the shortfall was of 112 billion euros, although for a different sample.
The European Banking Authority put that number at between 186 and 276 billion euros for 133 banks and warned of the market's capacity to absorb this huge amount of debt.
This wave of new issuances is likely to force banks to pay higher interest rates on their debt. Finding creditors may also not be easy as small investors got their bond savings burnt in recent rescues of banks in Italy or Portugal.
The write-down of bonds of Banca dell'Etruria, a regional lender in central Italy, led in 2015 to the suicide of a pensioner who lost his retirement money in the banking rescue.
A bank official said that some lenders will need more time than four years to raise the required capital. A second banking official played down the impact of the measure, saying it was widely expected.
Smaller banks under the SRB remit, which has under its watch a total of 142 institutions, will be for now exempted from binding capital targets. The largest, globally systemic banks like Deutsche Bank and BNP Paribas, are already required to meet buffer targets by 2019.
Among the banks that will be first required to meet binding targets, some have already reached them, the person familiar with the SRB told Reuters. Others will be given less than four years, and only those with larger shortfalls will need the full transition period.
Funding costs for those banks are expected to raise also because of the type of debt they will be required to issue. At least 12 percent of this capital should be easy to write down, the SRB said, a provision which is likely to attract higher interest rates as risks for investors grow.
Another possibly major headache could come from Britain's decision to leave the European Union, as bank debt issued under British law may no longer be compliant with buffer rules after Brexit.
"The SRB policy will exclude liabilities governed by the laws of third countries unless the bank is able to demonstrate that their write-down or bail-in would be effective," the SRB said.
In the absence of a consensual Brexit deal, euro zone banks may find that their long-term debt booked in Britain is no longer eligible for bank rescues, forcing them to issue more debt to meet the targets.
(Reporting by Francesco Guarascio; editing by Philip Blenkinsop/Jeremy Gaunt)