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  • Writer's pictureWilliam Webster

Hold bank senior debt?

It's something that I flagged last year. Bank senior debt may have a few surprises in store for those that hold it. There is increasing pressure to make sure that in the event of another crisis (and that's just a matter of time) senior bond holders take a haircut. Whilst banks complain that this will increase their cost of issuance it's only right. After all bond holders have been paid a credit spread for taking risk - a risk that was ultimately borne by the taxpayer. In this case haircuts are a great way of imposing discipline. It means banks that have strong balance sheets will end up paying much less to borrow than those that remain over leveraged. It will also make investors look very closely at what they have invested in. Of course it isn’t in place now but could be in the future. Now this creates uncertainty - something markets don’t like. So if you are an investor in bank senior debt be warned. Just the risk of future haircuts may impact on today's price. Is it time to review what's in your bond portfolio?

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