Bank bonds may be hit by changes
(3 February 2010 – UK) A United Kingdom-based investment house, Standard Life Investments, has said that a tightening of the regulatory environment around banks will likely have a negative impact on bank bonds.
The investment house believes that while the new regulatory approach being adopted in Europe, the US and elsewhere will ensure a safer banking system, it will have implications that investors will need to take into account, including higher bank funding costs and lower profitability within the sector.
Andrew Fraser, Standard Life Investments investment director, fixed interest, said the implications of future discussions around bank regulation would be important not only for bank profitability but for the holders of bank debt.
"The most important issue for bond investors is that if banks fail, future losses will henceforth be spread across the capital structure," Mr Fraser said.
"As regulation develops, we think that it is likely to mean that spreads on bank bonds will trade at wider levels relative to history."
Mr Fraser added that volatility in spreads would be persistent, implying investors would require a high-risk premium for holding the asset class.
He suggested that if bond investors were not comfortable with the new terms and conditions flowing from the changed regulatory environment, funding from institutional investors might be more difficult.
Andrew Fraser, Standard Life Investments investment director, fixed interest, said the implications of future discussions around bank regulation would be important not only for bank profitability but for the holders of bank debt.
"The most important issue for bond investors is that if banks fail, future losses will henceforth be spread across the capital structure," Mr Fraser said.
"As regulation develops, we think that it is likely to mean that spreads on bank bonds will trade at wider levels relative to history."
Mr Fraser added that volatility in spreads would be persistent, implying investors would require a high-risk premium for holding the asset class.
He suggested that if bond investors were not comfortable with the new terms and conditions flowing from the changed regulatory environment, funding from institutional investors might be more difficult.
Subscribe