16 May 2023
The European Banking Authority (EBA) published today a Report on the holdings by EU banks of minimum requirement for own funds and eligible liabilities (MREL) instruments issued by the most systemic European banks. As of 31 December 2021, these holdings appear small and potential direct contagion risks are, therefore, limited.
In particular, more than half of the resolution banks in the sample have exposures to eligible liabilities issued by global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs) below 2% of MREL and 0.6% of the total risk exposure amount (TREA).
In addition, the report finds that, overall, the largest EU banks do not rely on other banks to place their MREL instruments. As of December 2021, G-SIIs and O-SIIs had placed a limited 3.7% of their eligible liabilities with banks in the sample, with seven banks out of 72 placing more than 20%.
As a consequence of these limited exposures, direct spill over effects from a possible bail-in appear limited. The Report considered systemic crisis under two scenarios: (i) the failure of G-SIIs and O-SIIs rated below investment grade and (ii) the failure of the largest issuers of the sample. Under both scenarios, the contagion via direct exposures would not lead to a failure of any of the holders. None of the banks would breach their Pillar 2 Requirement (P2R) under any of the two scenarios.
Yet, it should be noted that the Report does identify some outliers with higher-than-average exposure. In particular, twenty-five banks report exposures above 8% of their MREL and six institutions report exposures above 20% of their MREL. Furthermore, the Report neither captures issuances by non-systemic banks nor considers the impact on banks with balance sheets below EUR 5bn – which limits its conclusions.
Franca Rosa Congiu