Regulatory Technical Standards on minimum requirement for own funds and eligible liabilities (MREL)

Status: Adopted and published in the Official Journal

These draft Regulatory Technical Standards (RTS) aim to specify the criteria to set the minimum requirement for own funds and eligible liabilities (MREL) laid down in the Bank Recovery and Resolution Directive (BRRD). They 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. Finally, the 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.

EBA expresses dissent over EU Commission proposed amendments to the MREL technical standards

EBA expresses dissent over EU Commission proposed amendments to the MREL technical standards

09 February 2016

The European Banking Authority (EBA) issued today an Opinion to the European Commission expressing its dissent over some of its proposed amendments to the EBA final draft Regulatory Technical Standard (RTS) on the criteria for setting the minimum requirement for own funds and eligible liabilities (MREL) and encouraging the prompt adoption of the standard.

On 3 July 2015, the EBA submitted its final draft RTS to the European Commission, which included references to the conditions for accessing resolution, specific provisions for setting MREL for systemic institutions, and an option to set a limited compliance transition period.

On 17 December 2015, the European Commission proposed a number of amendments to the RTS submitted by the EBA. In particular, it proposed to amend the reference to the burden-sharing requirement by shareholders and creditors of institutions of significant importance. Although the EBA agrees with the Commission's argument that the RTS cannot set a harmonised level of MREL, it dissents from some of these amendments as it believes legal clarity and certainty is needed when setting MREL for a systemic institution which may need to access resolution funds.

In addition, the Commission proposed to remove several specific provisions relating to the criteria for setting MREL for systemic institutions, to the consultation between competent and resolution authorities on specific matters and the upper limit on the transitional compliance period. The EBA dissents from these amendments as it believes they would reduce the effectiveness of the RTS in promoting smooth cooperation and convergence when setting MRELs. 

With this Opinion the EBA also calls on the Commission to promptly adopt these important RTS.

Background and legal basis

The final draft Regulatory Technical Standards (RTS) on criteria for setting MREL have been developed according to Article 45(2) of the Bank Recovery and Resolution Directive (BRRD) and were submitted to the Commission for endorsement on 3 July 2015.

On 18 December 2015, the Commission informed the EBA that in accordance with the procedure set out in the fifth subparagraphs of Article 15(1) of Regulation (EU) No 1093/2010, it intended to amend the final draft RTS submitted by the EBA.

The EBA's competence to deliver an opinion is based on the fifth subparagraph of Article 15(1) of Regulation (EU) No 1093/2010. In accordance with Article 14(5) of the Rules of Procedure of the Board of Supervisors, the Board of Supervisors adopted this Opinion.

Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772

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.

Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772

EBA consults on criteria for determining the minimum requirement for own funds and eligible liabilities (MREL)

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.

Consultation process 

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.
 

Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772