TLAC-Eligible Debt: Who Holds It? A View from the Euro Area

Abstract

We identify two categories of potentially ‘bad investors’ in TLAC-eligible bonds for the purpose of bail-in, i.e. households and hedge funds. The exposure of households may create political economy problems for policy makers when they have to decide about bail-in, while holdings by hedge funds may increase the price volatility of these instruments in stress periods. We analyze the composition of the investor base of the TLAC bonds issued by euro area G-SIBs between 2013 and 2020 and make a first assessment of whether the observed developments could have lessened the above mentioned problems. We show that the composition of the holdings of the different sectors has changed significantly over time. The share directly held by households has declined, is low on aggregate, and should not necessarily be an obstacle to the resolution of a G-SIB. However, there is a negative correlation between households’ TLAC holdings and their financial education. The information gap around the holdings of hedge funds means a full assessment of their role is not feasible. The market tensions that followed the Covid-19 shock did not negatively affect investments in TLAC debt, except for those of households which fell markedly in the first half of 2020.