Europe Banks Told to Avoid SLB Debt to Meet Capital Requirements

Europe’s top banking supervisor warned lenders against using bonds tied to sustainable targets to meet regulatory capital requirements, since missing those goals could pose a risk to financial stability.

The European Banking Authority said in a report Thursday that use of sustainability-linked bonds as debt to absorb losses should not be allowed, as it could lead to redemptions or weaken credit ratings if banks failed to meet the targets. The problem lies in the call options and coupon step-ups that these bonds typically contain.

“We would expect that the banks do not proceed with such features in capital issuances,” Franca ...