News & Analysis

Banks exposed to trillions in costs: Could there be a bond crash?

Andrew Saks, Thursday, 17 June 2021

Ten major banks have been banned from selling bonds, one of the core business activities of most Tier 1 financial institutions by authorities in the European Union, largely as a result of sanctions on the firms due to further assessment by regulators on whether the banks have broken antitrust rules.

Some of the world's most prominent FX interbank market makers, those being Deutsche Bank, Nomura Holdings, UniCredit, NatWest Group, Natixis, Credit Agricole, JPMorgan Chase, Citigroup, Bank of America and Barclays Plc are affected by the ban which has just been announced in the early hours of this afternoon Central European Time.

Part of the blocking of bond sales by these major banks has taken place to cost the banks a fortune in fees, however despite this extreme execution of bureaucracy, banks have shrugged it off and estimate that it won't cost them too dearly or affect the overall performance of their trading desks.

Just last week, the EU prepared to issue $1 trillion in bonds which have recovered more slowly from the recent price drop than most Eurozone debt, and the ECB is widely expected to continue with €80 billion per month of net bond purchases at its latest policy meeting on last week. Even so, the topic of a reduction in the pace of buying is likely to return later in the year as economies rebound from the lockdowns.

Syndicated bond sales, in which a government debt office will appoint a panel of underwriters, banks and broker-dealers to carry out syndicated transactions and are called such because the banks will form a debt syndicate, a group of underwriters, usually investment banks, who will manage the debt offering.

This government initiative may well be aimed at the coffers of the banks, but it could reshape the entire debt figures for the European Union region, hand large fees to smaller competitors and even weigh on bankers' bonuses.

Bloomberg has stated today that the 20-billion-euro issuance of bonds by the syndication bloc, the largest amount the EU has raised in a single transaction, may have generated more than $20 million in fees in just two days.

The ten banks barred from the syndications are among a list of 39 so-called "primary dealers", or as they are known in the FX and electronic trading industry, Tier 1 market makers, which have a responsibility to bid for bonds during regular debt auctions. The EU is expected to begin those in September.

Stopping banks from participating in bond sales is rare, and a first for the EU since it started selling debt in meaningful sizes under its social program last year.

There is still tremendous demand for these bonds, despite the ten banks now missing from the syndicate, as over 142 billion euros worth of orders from investors took place on Tuesday this week, when the industry itself had already begun adhering to the ban.

According to reports today, BNP Paribas SA, DZ Bank AG, HSBC Holdings, IMI-Intesa Sanpaolo and Morgan Stanley were the leaders of that syndicate, with Danske Bank and Banco Santander hired as co-leads.

The majority of the banks which are now unable to participate in the bond sales are Tier 1 FX dealers with large market share percentages in the FX sector, whereas only three in the existing syndicate have any form of FX market share.

No shift has been made yet, but banks could do well to lower their counterparty credit threshold and bring back on board the OTC derivatives brokers that have been a vital source of revenue for many years until the non-bank market makers filled a gap that the banks were unable to fill.

As far as the EU bonds are concerned, being unable to participate in their sale is perhaps a rule whose damage is yet to be seen, as the €80 billion of Next Generation EU debt the EU plans to issue in the second half of the year will make it the biggest net borrower in the euro area over that period.

The commission aims to raise up to €800bn between now and the end of 2026 for the programme, with about €407bn available for grants to member states and €386bn for loans. Borrowing volumes will average €150 billion a year and about 30% of the bonds is ultimately expected to be earmarked as green bonds to bolster sustainable finance.


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