Regulatory Technical Standards on contractual recognition of bail-in

Status: Final draft adopted by the EBA and submitted to the European Commission

These draft Regulatory Technical Standards (RTS) support the effective application of the write-down and conversion powers in relation to liabilities governed by the law of a third country. These RTS and are part of EBA's work to promote the effective application of recovery and resolution powers to banks and banking groups with a cross-border presence and to foster convergence of practices between relevant authorities and institutions across the EU.

EBA publishes final technical standards to ensure effective resolution under the BRRD

EBA publishes final technical standards to ensure effective resolution under the BRRD

03 July 2015

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the Minimum Requirement for Own Funds and Eligible Liabilities (MREL), and on the contractual recognition of bail-in. Both standards provide further specification of essential elements to ensure the effectiveness of the resolution regime established by the Bank Recovery and Resolution Directive (BRRD). These standards are part of the EBA's major programme of work to implement the BRRD and address the problem of too-big-to-fail banks.

The first set of standards on MREL ensure that institutions have adequate loss absorbing capacity. 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. Banks need to be resolvable without causing financial instability and without needing public money and a robust MREL is needed to ensure this is possible.

In order to cater for the diversity of institutions and business models across the EU, the MREL is not a fixed figure. Instead, it must be set by resolution authorities on a case-by-case basis for each institution to ensure it is sufficient to implement their resolution plans. However, for consistency, the BRRD lays down common criteria for resolution authorities to apply, which are further specified by the EBA technical standards. 

In particular, the standards clarify how each institution's capital requirements should be linked to the amount of MREL needed to absorb losses and how, to the extent necessary and given the resolution plan for the institution, a firm should be recapitalised after resolution. Resolution authorities should, as a default, rely on supervisory assessments of the degree of loss that a bank needs to be able to absorb and the capital it needs to operate. These features mean that banks which are simpler, less risky, and easier to resolve should expect to have lower MREL requirements.

The standards have been adjusted following consultation feedback to ensure they provide a clear framework for linking the MREL to capital requirements, including where some parts of capital buffer or Pillar 2 requirements are not relevant to the aims of MREL, and to clarify the treatment of contributions from Deposit Guarantee Schemes (DGS) to the cost of resolution.  They also provide for a more tailored approach for financial market infrastructure firms which are subject to the MREL requirements and for subsidiaries of groups.

MREL shares the same goal as the FSB's TLAC proposals and also many of the most important design features. The EBA final draft standards on MREL aim to avoid creating obstacles for those EU resolution authorities with responsibility for Globally Systemically Important Institutions (G-SIIs) and seek to apply MREL in a way which is compatible with the FSB's TLAC proposal. The EBA is closely monitoring the FSB's work to finalise the TLAC standard and is required to prepare a report on the consistency between MREL and international standards by October 2016. The EBA also expects to publish further analysis of European banks' current MREL positions in due course.

The second set of standards aims to ensure the cross-border effectiveness of the bail-in power.  Where liabilities within the scope of the write-down and conversion powers are governed by the law of a third country, including any such liabilities forming part of MREL, the BRRD requires agreements concerning such liabilities to include a contractual recognition term.  This is a contractual term by which the creditor (or party to the agreement creating the liability) acknowledges the liability may be subject to these powers and agrees to be bound by any reduction of the principal or outstanding amount due, conversion or cancellation that is affected by the exercise of the powers by an EU resolution authority.

The final draft RTS further determine the cases in which the requirement to include the contractual term does not apply. In particular, the requirement is displaced where an adequate statutory regime in the relevant third country or an international agreement exists which provides for an administrative or judicial procedure to secure recognition of the application of the write-down and conversion powers by an EU resolution authority.

In addition, further to consultation feedback, the final draft RTS also specify that liabilities that are fully secured in accordance with EU regulatory requirements or equivalent third country law need not include the contractual term.

Importantly, the final draft RTS specify the minimum contents of the contractual term. The EBA's approach is designed to strike a balance between the need for harmonisation and the need for flexibility to take account of any issues arising in relation to a specific third country law, type of liability or arbitrage risk.

Legal basis

These final draft RTS on MREL have been developed according to Article 45 of the BRRD, which mandates the EBA to further specify the MREL criteria.

The final draft RTS on contractual recognition have been developed according to  Article 55(3) of the BRRD, which requires the EBA to further determine the list of liabilities to which the exclusion in Article 55(1) of the BRRD applied, and the contents of the terms required in that paragraph, taking into account banks' different business models.

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