German Banking Industry Committee

Definitely. The permission regime would limit banks’ freedom to choose their refinancing if certain instruments (eligible deposits, preferred senior) became subject to it.

Should the EBA expect institutions to issue fewer MREL-eligible instruments in future if necessary, because of the permission regime, this would have to be critically assessed for a number of reasons:

• The creation of an additional class of instruments would no longer be understandable for cli-ent/consumer. There would be an increased tendency for instruments to be bail-in-eligible, but not MREL-eligible. This could not be communicated to the general public.
• Assuming that insolvency institutions increasingly issued such "non-MREL instruments": If such an institution were then still to be resolved pursuant to BRRD, it would be seriously lack-ing MREL capital. In the interests of ensuring a smooth resolution, this approach is therefore not to be recommended.

The permission obligation should thus be significantly reduced in order to avert the aforementioned effects and not to endanger consumer protection.
Article 8 / Article 9 of the RTS draft: while we are aware of the EBA’s mandate, the implementation should nonetheless not overlook the fact that eligible liabilities differ significantly from own funds in-struments, particularly with regard to the number of issues, the types of investor and denominations. We see as especially problematic the regulations that affect bank customers. It is our understanding that the concept of direct funding includes the following constellations:

The bank makes a (securities) loan to a customer. In its securities account – with a high level of over-collateralisation – the customer holds bonds/debentures/debt instruments issued by the bank that meet the criteria for eligible liabilities. For own funds instruments, banks have solved the conflict aris-ing therefrom by excluding them from the hypothecation agreement and collateral-eligibility calcula-tion already at the contract stage. As a rule, only own shares (treasury stock) were affected. An ex-tension of this approach to eligible liabilities is theoretically possible. It is, however, difficult to convey to customers that bonds/debentures debt instruments issued by third-party institutions (with corre-sponding default risks) can be considered as collateral, but not the debt instruments issued by their own bank.

Even a permanent monitoring of a customers’ securities accounts to apply the rules by means of an appropriate reduction in volume of direct funding of own funds / eligible liabilities is still doable for the manageable number of own funds instruments, but for the significantly higher number of debt in-struments means considerable operational cost and effort.

We therefore consider it necessary that such situations, where customer asset investment (and not the bank’s funding) is at the forefront, be excluded from the regulations for direct funding. For such situations, however, there should be introduced at least a de minimis provision according to which stock exchange listed debt instruments up to an amount of, say, EUR 500k per customer who at the same time has taken out a loan be not considered direct funding.
From the explanatory box for consultation purposes on Article 28 we understand that with regard to remuneration, the EBA did not want to change the content of the current RTS (Article 29 (4)). On p.31 the EBA accordingly states “(…) have only been moved here from the former Article 29(4) in order to bundle provisions related to deductions in Article 28”. In particular, the proposed new RTS still says “deduct these instruments from own funds on a corresponding deduction approach for the time they are held” (Article 28 (4)). However, since the proposed new Article 28 (4) combines the remuneration topic with “When applying for a general prior permission (…)” (beginning of the first sentence of the proposed new Article 28 (4)), it becomes confusing. For a prior permission and a general prior per-mission, the proposed paragraphs Article 28 (2) and (3) clearly specify that the approved amount has to be deducted once the permission has been obtained. For the remuneration case in the proposed new Article 28 (4), this leads to the impression that the instruments held have to be deducted in ad-dition to the general deduction of the predetermined amount for the general prior permission and that the remuneration buybacks also have to be included in, and monitored against, the limit of the predetermined amount of the general prior permission. Therefore, please ensure that the remunera-tion topic (current Article 29 (4)) is not mixed up with the general prior permission and that the insti-tution can apply for a separate employee remuneration permission as under the current Article 29 (4) (for which under the current practice no euro amount is granted but permission allowing the buyback etc. of e.g. a certain number of shares), under which only the instruments actually held need to be deducted and that such remuneration cases do not have to be included in, and monitored against, the limit of the predetermined amount of the general prior permission. For this purpose, we recom-mend using the wording of the current Article 29 (4).
Finally, please note that it is typical that employees receive an award of e.g. a number of shares, and not of an EUR-amount as share-equivalent in order to participate in the risks and opportunities of the bank. As a consequence, the bank has a delivery obligation of a certain number of shares, and hence a purchase requirement for this number of shares. Therefore, it is preferable that applications for permission for share buybacks with respect to remuneration could continue to ask for approval of a maximum number of shares instead of a euro amount. This would avoid seeking approval of an uncer-tain projection relying on a future share price assumption.
We understand Art. 30 of the draft RTS for the application for a general prior permission as meaning that in future applications of all securities issues affected by these have to be listed explicitly. In this regard, there could, in our opinion, certainly be cases that are not covered by the general prior per-mission. Additional permission to cover immaterial redemptions or reductions analogous to the provi-sion of Art. 29 (5) of the current RTS is in our view entirely reasonable. We would welcome the reten-tion of this provision and the extension to eligible liabilities.

In addition, we consider the continuation of a general prior permission without an individual applica-tion for a relative immaterial amount advisable, so that the authorities can act with flexibility, as the extensive widening of the permission regime would mean they would be overwhelmed. Alternatively, for such “immaterial (de minimis)” cases, a notification procedure is conceivable.
Article 30 draft RTS: We consider the information required by the supervisory authority too extensive. This is all the more so since the supervisory authority already has a large amount of information re-quested via the existing COREP or MREL reporting. It should also be borne in mind that the validity of the prior permission granted is now limited to one year and that the requested information must therefore be provided on an annual basis. The renewed submission of these data would be a clear case of double collection of information already available.

In particular, with regard to the requested planning figures for the next three years, we see no need for such a strict requirement. Banks usually update their multi-annual planning (MYP) once a year. The preparation of multi-annual planning is a complex process within the bank and is also the subject of committee decisions. The multi-annual planning is forwarded to the supervisory authorities in a timely manner after approval by the bank's committees. Planning figures in addition to the last MYP submit-ted to the supervisory authority are not available in the bank at the time of application.

We would welcome it if, as part of the application, the resubmission of multi-annual planning was dropped. Should, from the supervisory point of view, a resubmission be necessary, it must be made clear in the RTS that this is the bank's annual updated multi-annual plan and that no further update is required at the time of application. Assuming that separate applications must be submitted for own funds instruments and eligible liabilities and that as soon as eight months after the approval of an application for prior permission a new application must be submitted, the latter is not doable.

In this context, we would also like to address a point relating to Article 30a of the draft RTS: according to our understanding of the draft Art. 30a of the RTS, prior permission is no longer granted for a single class of capital. Rather, the application must list individually all the issues (of instruments) concerned. Assuming that in future, prior permission will not be applied for all issues of a capital class, this pro-cess will increase the monitoring burden with regard to compliance with the prior permission.

We therefore ask that the possibility of applying for an entire class of capital be maintained. This solves the problem too, addressed by the regulator in Article 30a (3) of the draft RTS, of market mak-ing in issuances which were issued after the application had been submitted. Given a period of four months between submission and permission, it is difficult for institutions to assess at the time of application the extent to which they will actually bring out new issues in the coming 16 months, as this is highly dependent on market conditions.

Also, with regard to the identical requirement for eligible liabilities, a procedure in which all issuances must be listed individually seems to us to be hardly expedient, given the number of issuances con-cerned.

In the case of applications for entire capital classes, the relevant individual issues are available to the regulator via the banks’ disclosure or through the SRB’s liability data reporting (LDR).

For us, it is, as regards content, unclear why prior permission should not always apply to all instru-ments of a capital class that are outstanding, thus impede, for example, the market-making in new issues without any discernible prudential benefits.
We generally consider a four-month application deadline as disproportionately long for permission with a validity period of one year. This is all the more the case, given the volume of information that has to be submitted with an application. So, in this regard we welcome the efforts to shorten the ap-plication period for follow-up/subsequent applications and call for a processing time of one month.

However, we consider the long application deadline for individual applications for the redemption or reduction of individual issues to be more problematic. These are driven, among other things, by cur-rent market developments, but also by fixed contractual termination agreements and, in the case of eligible liabilities, possibly also by requests from customers holding an eligible debt instrument or even a longer-term deposit. Any extension of the application / permission periods will result in less flexibility and responsiveness by the banks. With a four-month approval period, the market trends will in many cases have changed in such a way that the planned redemption/repurchase is no longer in the bank's interest. Even a customer who asks the bank to repurchase/redeem its promissory note loan or to repay his deposit in the event of urgent liquidity needs (e.g. in the event of an unforeseea-ble Corona-related works closure) will not normally be able to wait four months for a decision. In this respect, a long authorisation period will force banks to apply for significantly more prior permissions, which due to the related deduction obligations will have a negative impact on the corresponding rati-os. For a solution that we consider practicable, we refer to our proposal to introduce a de minimis rule with a notification procedure.

In addition, in this context, we would also like to point out once again our position already stated un-der General Remarks that total alignment of the regulations for own funds and eligible liabilities is not necessary and possibly not appropriate. There are considerable differences between both groups that the RTS does not sufficiently take into account. Art. 78a (3) S. 2 CRR, moreover, provides for total alignment only for the definition of the term “at terms that are sustainable for the income capacity of the institution”.
Applying the same mechanism for own funds to eligible liabilities creates a disproportionate burden for banks, as eligible liabilities, unlike own funds, do not absorb losses in a business-as-usual or crisis situation but only in the extreme case of a resolution. Thus, mandating RAs to assess any reduction with a view on the long-term profitability seems like a case of goldplating. In addition, the assessment by the RA is not well defined and leaves room for interpretation.
Deducting eligible liabilities at the point of receiving permission is highly inappropriate and dispropor-tionate. The purpose of MREL is to have sufficient own funds and eligible liabilities, for which a com-plex calculation is used and a dedicated regime for handling violations is in place. In addition, the in-troduction of an M-MDA and the ineligibility of own funds used for buffer requirements for MREL act both as safeguards and buffers above MREL to ensure that sufficient capacity for loss-absorption and recapitalization is available at all times. Deducting any amounts above that not only ignores the differ-ent qualities and riskiness of the instruments in question (CET1, AT1 and T2 instruments as the first instrument classes to bear losses vs. eligible liabilities that are senior in nature and rank above all own funds) but also reduces the complex bank-specific calculation of MREL with its complex add-ons, buff-ers and group-specific adjustments to absurdity. It is a core task of resolution authorities to set MREL high enough so that it suffices to recapitalize a bank. This is the very nature of MREL, governed by the specific laws and policies for MREL. Thus, there is neither a need nor a mandate for EBA to go beyond this and interfere by means of an automatic deduction. No prudency is added by deducting the amounts under the permission regime.

By means of not granting permission to redeem early, the resolution authorities already have the ability to prevent an early redemption. Yet the automatic deduction would

i) forcibly violate proportionality
ii) unduly interfere with the existing MREL requirements by effectively increasing them through the back door and
iii) unduly limit banks’ flexibility in managing their refinancing/funding freely and in reaction to changing market conditions.

It should be added that for the transitory time between the entry into force of the revised CRR provi-sions and the publication of the RTS, the SRB refrained from demanding automatic deduction for to the abovementioned reasons.

Another practical case that would be relevant were if an instrument were to be replaced by a similar instrument, the MREL contribution would have to be deducted when permission is granted (irrespec-tive of whether it involved a general prior permission or an individual application), while the replace-ment could be executed only with a certain delay (of at least several days) after the approval (for ad-ministrative and processing reasons). Thus, timewise there would inevitably be a gap during which a bank’s MREL capacity is effectively reduced, which would exacerbate risk, despite the fact that it is the goal of the regime to prevent this.

If at all, the deductions should not be required until permission is actually used and the instrument repurchased on a permanent basis. As banks could, alternatively, proceed to submit staggered appli-cations for ad hoc permissions to reduce, even weekly or monthly, this would mean a huge adminis-trative workload for the resolution authorities, which they could hardly tackle.

Should the EBA nevertheless consider a deduction for both non-preferred senior and preferred senior instruments necessary, a regulation would in our view definitely have to be included to the effect that repurchase limits for preferred senior instruments could also be deducted from these and only repur-chase limits for non-preferred senior instruments have to be deducted from this class. Such a differ-entiation can be significant with regard to compliance with the subordination requirements set out by the resolution authorities.

With regard to the scope of application of the deduction circumstances for eligible liabilities, the fol-lowing contradiction arises in addition with regard to insolvency institutions: for these institutions, the MREL ratio is limited to the extent that no other eligible liabilities need to be maintained beyond the own funds requirements, cf. Art. 45c (2) subpara 2 BRRD. In addition, the reporting and disclosure requirements relating to MREL do not generally apply to them, Art. 45i (4) BRRD. This means that these institutions do not have any stock of instruments from which the amount to be repaid could be deducted, at least one possible stock is not shown separately. The proposals for deduction are there-fore currently not compatible with the regulations of the BRRD. This is another argument that insol-vency institutions should not be covered by this RTS in the context of the permission procedure for reducing eligible liabilities.
We do not agree because the drafting of the requests and the processing by the RAs would take far too long to handle matters flexibly. Take, for example, a case where an individual investor who has bought an eligible instrument as a private placement approaches the bank with a request for early redemption. This customer expects an instant response. Preparing an application and receiving ap-proval form the RAs would take weeks, so that neither the creditor’s interest to receive a swift answer nor the bank’s interest to offer customer-oriented solutions is satisfied. Note that all of this does not affect or endanger MREL or loss-absorption capacity, as MREL has to be maintained at all times and a breach would in any case have to be notified by the bank.

Rather, the general approval framework should allow institutions to implement both market mak-ing/maintenance activities and redemptions/buy-backs/terminations of MREL-eligible liabilities without economic restrictions. In contrast to the management of own funds instruments, decisions in liability management must be taken in the short term, taking into account current market conditions and as part of liquidity management. A permission decision would therefore have to be requested and made within 1-2 days.
If general prior permission is intended to include also replacements under very similar conditions, it would be advisable to increase the limit to allow banks to manage their liabilities more freely. There is no downside risk for the resolution authorities here, as permissions could always be denied or grant-ed only for a lower amount. However, a principle maximum limit unnecessarily narrows banks’ as well as resolution authorities’ leeway in finding proper solutions for granting maximum freedom while also safely ensuring MREL compliance.

The application of the 3% ratio to be applied to own funds, which is quite understandable when repur-chasing own funds instruments, but which, from a practical point of view, puts the possible repur-chase amount for MREL far too low, is problematic for the following reasons too: CET1, AT1 and Tier2 instruments have been issued in the past and are also currently issued mainly in large volumes, where early repurchase is usually not considered and is not economically viable either, so that the 3% ratio is sufficient for the management of possible market making obligations of an issuer. MREL liabili-ties, on the other hand, include many issues that have a right of termination. For some institutions, such liabilities represent a large share of the total volume of existing MREL liabilities, which is well above 3%. A grandfathering provision would be appropriate here, as indicated in the "Explanatory box" for Art. 32b of the TS draft.

The argument that in their final year prior to maturity MREL instruments do not count any more as eligible liabilities and are therefore exempt from the 3% rule (see "Explanatory box to Art. 32c TS draft") is not apparent to us. Nor is this conclusion to be found in the wording of the proposed Art. 32c of the draft RTS, which focuses precisely on these instruments. We ask for clarification in this re-gard.
Furthermore, it would be desirable to have clarification on what basis the 3% limit is calculated - at the time of application, at the time of approval (but this can then be only a forecast estimate) or based on the last official reporting day?

We consider necessary, moreover, clarification of which specific eligible liabilities are to be included in the basis for calculating the 3% limit and, therefore, how the term "outstanding eligible liabilities in-struments" is defined. We expect that the relevant amount / value must be the “outstanding amount” (less accrued interest) as defined, inter alia, in Commission Implementing Regulation EU 2018/1624, Annex II, thus the same value as considered for the calculation of the amount eligible for MREL / TLAC. Nonetheless we would appreciate a clarification in this regard as well.

With regard to the 3% limit, the provisional implementation of Art. 78a CRR by means of the “MREL Addendum to the SRB 2018 MREL policy of the SRB”, which set the limit at 1% TREA, could also be invoked at a superordinate level. Apparently, the SRB considers this limit to be sufficient to protect the resolvability of institutions. In our opinion, the EBA should be guided by this.
From the comments already made in the general remarks, to which we expressly refer here, we re-ject the inclusion of insolvency institutions for which no resolution measures have been set out in the resolution plan in the scope of application of the permission process. The same applies to waiver in-stitutions.

For insolvency institutions with a minimum MREL requirement at individual level, the inclusion in the repurchase permission requirement and the proposed extension to legacy holdings of MREL-eligible liabilities means that, despite a significant over-fulfilment of the MREL minimum requirements, they would have to submit permission applications and install appropriate monitoring systems solely to comply with the supervisory requirements for withdrawals/repurchases of individual liabilities.

In this context, the following aspect should be noted too: As already noted re Article 32b RTS draft (Q11) with regard to the deduction obligations, we consider an application and thus also a deduction obligation on a separate basis by class of eligible liabilities (preferred senior and non-preferred senior instruments) necessary, should the inclusion of preferred senior instruments be retained.
The information requested pursuant to Art. 32d of the RTS draft is, for the most part, information not previously required by the SRB. It is incomprehensible why such a mass of information is being re-quested. This does not seem appropriate to us in view of the risk of a permission granted. The deci-sion whether an institution has sufficient MREL-eligible liabilities can, in our opinion, be adequately made with confidence on the basis of information provided by the “MREL Addendum to the SRB 2018 MREL policy of the SRB”.

In particular, the information to be provided in (a) constitutes a purely qualitative requirement as to the reasons for the submission of the application. In this respect, it would be desirable if this could be explained more precisely, what is considered to be a "well-founded explanation", since the previous requirement for the presentation by the banks, but also for the assessment by the authorities, leaves a considerable margin of discretion.

For insolvency institutions, which are not subject to any obligation to hold eligible liabilities, the re-quest for information would, if they were to continue to be subject to the permission regime, be arbi-trary, disproportionate and unnecessary in all respects.

In addition, we refer also to our comments on Q8, Art. 30 RTS. The information request pursuant to Art. 32d RTS is far too detailed as well. The provision for a three-year prognosis is disproportionate, as institutions regularly provide such information as part of their MREL reporting (at least in the banking union). Considering the small amounts of total MREL capacity within the scope of these deliberations, this would effectively set up a whole new reporting process that is error-prone and duplicates existing MREL reporting, which seems unsubstantiated given the fact that MREL compliance is already ensured by regular reporting to RAs.

With regard to Art. 32e RTS we want to point out that it is not limited to market making. It is the very nature of a general prior permission to cover all kinds of liabilities, incl. those that may not even have been issued at the time of applying for said permission, also for example private placements. Conse-quently, it is not only illogical to request a full list but simply impossible. A list of outstanding liabilities is provided regularly to the RAs through the annual resolution reporting (CIR, LDR for the banking un-ion). We also refer to our comments on Art. 30a RTS.

In addition, we take into account the requirement under Art. 32d (1) lit. g), the evaluation of the risks including outcomes of stress tests on main risks evidencing potential losses does not seem appro-priate since many other risk buffers and other risk mitigation instruments (e.g. M-MDA) are already in place. Furthermore, the risk assessment can be adequately made with confidence on the basis of information provided by the “MREL Addendum to the SRB 2018 MREL policy of the SRB” as well as provided within the regular quarterly EBA reporting starting from June 2021.
We refer to our answer to Q9, Art. 30f RTS. In addition, it is advisable to have some lead time, and we also welcome the shortening of the deadline for renewals of existing permissions. Much more im-portant, however, is the point in time when the bank is informed about the outcome of a decision. Resolution authorities must commit to providing feedback fast and inform the bank with sufficient leeway about the outcome of the permission so that there is sufficient time to respond. There should be time in the process to check and allow (time for) a resubmission if problems were identified in a first application.

Besides the shortening of the lead time for follow-up applications, the amount of documentation to be submitted should be sufficient to provide the qualitative information and an update of the docu-ments already submitted with regard to the new amount requested and the period of time requested for the permission, as this would restore the transparency of information for the resolution and su-pervisory authorities to the status when the original application was submitted.

With regarding to Art. 32e RTS, we do see a risk here for unnecessary complications in the back and forth between authorities. Given the relatively low amounts and their removal from actual loss-absorption in comparison with own funds, such cumbersome processes are in no proportion to the effort they require and the risks they cover.
Olaf Achtelik