Regulatory discussions about forcing senior unsecured investors to share the cost of bailing out failed banks, and regulations promoting covered bonds and deposits were deemed worrying by a panellist at an ICMA Primary Market Forum in London yesterday (Thursday).

Roger Doig, credit analyst at Schroders, said that regulatory bail-in discussions were alienating ratings-driven investors, who represent a source of countercyclical investment. This was disconcerting because it had negative implications for market liquidity, which was already “consistently awful”.

“These proposals, by driving down ratings of banks’ unsecured debt, are a concern for us because there may not be enough countercyclical investors available for us to sell to should we need to without there being a price default,” said Doig.

“New regulation of bank liquidity has already removed banks as an investor base in senior unsecured,” he added. “If insurers reduce their appetite for bank funding as a result of the structural subordination of senior unsecured due to bail in and bank resolution tools, we expect that liquidity will get even worse.”

Under Basel III regulations retail deposits can count towards banks’ net stable funding ratios (NSFR), and market participants believe this will encourage banks to chase deposits in a bid to shore up their capital ratios. The regulations also accept covered bonds as Level 2 liquid assets, meaning they can count towards Liquidity Coverage Ratios (LCRs), up to a 40% limit and with a 15% haircut.

“We are concerned that these rules will incentivise larger banks to engage in deposit wars that will destabilise smaller institutions,” said Doig.

Spanish banks have already been engaged in fierce competition to attract deposits, offering high yields as an incentive, and Doig later told The Covered Bond Report that could raise questions about the assets a cédulas holder would be entitled to in the event of a default.

There was in general a lack of clarity about where covered bonds actually rank in relation to deposits and repo, he said during the panel discussion, calling for clarification as deposit taking institutions are encouraged to issue more and more covered bonds.

“Are covered bondholders ranked pari passu with depositors? What about repo?” he asked.