EBA consults on criteria for determining the minimum requirement for own funds and eligible liabilities (MREL)
28 November 2014
The European Banking Authority (EBA) launched today a public consultation on draft Regulatory Technical Standards (RTS) further specifying the criteria to set the minimum requirement for own funds and eligible liabilities (MREL) laid down in the Bank Recovery and Resolution Directive (BRRD). The aim of these standards is to achieve an appropriate degree of convergence in how these criteria are interpreted and applied across the EU to ensure a level playing field. Institutions with similar risk profiles, resolvability and other characteristics in any Member State should have similar levels of MREL. The consultation runs until 27 February 2015.
The BRRD provides a common resolution regime in the European Union that allows resolution authorities to deal with failing institutions as well as ensuring cooperation between home and host countries. In the future, shareholders and creditors will have to internalise the burden of a bank's failure, thus minimising moral hazard and risks to taxpayers.
To avoid institutions structuring their liabilities in a way that hampers the effectiveness of bail-in or other resolution tools, the BRRD requires institutions to meet a robust minimum requirement for own funds and eligible liabilities (MREL). This is not a fixed figure imposed by legislation, but is to be set on a case-by-case basis by resolution authorities. To ensure consistency, the BRRD lays down common criteria for resolution authorities to apply and these technical standards further specify these minimum criteria.
The BRRD criteria require resolution authorities to consider matters which are also assessed for prudential regulatory purposes. These technical standards therefore clarify how the institution's capital requirements should be linked to the amount of MREL needed to absorb losses and, where necessary, recapitalise a firm after resolution. Resolution authorities should, as a default, rely on supervisory assessments for the degree of loss that a bank needs to be able to absorb and the capital it needs to operate.
Resolution authorities must set an MREL which is sufficient to implement the resolution plan. In particular, resolution plans may identify that it would be less feasible or credible to bail in certain liabilities, even if it is legally possible. In these cases, resolution authorities would need to either increase the MREL or take alternative measures (e.g. affecting the ranking of liabilities in insolvency). The draft RTS also consider the effect of Deposit Guarantee Scheme (DGS) contributions to the cost of resolution.
Lastly, the draft RTS propose that for systemic institutions, resolution authorities should consider the potential need to be able to access the resolution financing arrangement if a resolution relying solely on the institution's own resources is not possible. The BRRD sets minimum burden-sharing requirements before the resolution fund can be accessed.
These RTS are compatible with the proposed FSB term sheet for Total Loss Absorbing Capacity (TLAC) for Globally Systemically Important Banks (G-SIBs). Where there are differences resulting from the nature of the EBA's mandate under the BRRD, as well as the fact that the BRRD MREL requirement applies to banks which are not G-SIBs, these differences do not prevent resolution authorities from implementing the MREL for G-SIBs consistently with the international framework.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 27 February 2015.
A public hearing will then take place at the EBA premises on 19 January from 10:00 to 13:00 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.
Legal basis and next steps
These draft RTS have been developed according to Article 45 of the BRRD, which mandates the EBA to further specify the MREL criteria.
The EBA is required by the BRRD to further consider consistency with international standards as part of a report on MREL which is expected to be published in 2016.
Franca Rosa Congiu
E-mail: email@example.com - Tel: +44 (0) 207 382 1772