By Huw Jones
LONDON (Reuters) - Banks in the European Union must quickly Brexit-proof a special type of debt they use to shore up their capital defenses, the EU's banks rescue agency said on Tuesday.
After the financial crisis, regulators have forced banks to bolster their capital with these special bonds that buyers agree can be written down in a crisis to avoid a taxpayer bailout.
Much of this debt, known as MREL, has been issued under British law, casting doubt on whether EU regulators could legally write it down after Britain leaves the bloc next year.
"We have started last year and will carry on this year to tell banks that you need to be prepared for the worst," Elke Koenig, chair of the Single Resolution Board, told the economic affairs committee in the European Parliament.
"The worst would be that after Brexit all issuances under English law ... would no longer be qualifying for MREL."
"We warned that everything that gets issued now should, de minimus, have a contractual clause," Koenig said, adding that it would be preferable to have statutory or legal backing.
Some of the debt already has clauses to acknowledge that EU regulators could also write them down.
Most of the EU's 35-40 biggest banks are issuing billions of euros of bonds to meet the MREL requirements set by the SRB last November.
Half of banks already meet their targets, while a number need another two years, though for some "it's really stretched," Koenig said.
"It's a journey and the targets we gave in 2017 were only one step on this journey. More will have to come, quality in particular, but also possibly in quantity," Koenig said.
The combination of MREL and "death" or resolution plans setting out how a bank can be wound up without causing financial system meltdowns, are a multi-year project, she said.
"Building MREL should happen now. The sun is shining and there is no reason to wait," she said.
The SRB also needed more flexibility in setting individual MREL targets, and powers to directly impose them on banks rather than leaving this to national watchdogs, she said.
Koenig urged banks to tackle the EU's 950 billion euro bad loan mountain. "If the next crisis comes on these levels of non-performing loans, it won't be pretty."
