Komerční banka, a.s. has contributed to the response provided by the Czech Banking Association on this consultation and we support the response.
We wish to add following comments:
We suggest as the most adequate default level for the definition of the loss absorption amount (LAA) the own funds requirements pursuant to Article 92 of Regulation (EU) No 575/2013 (i.e. the minimum capital requirement of 8% of total risk exposure). The inclusion of other elements of capital requirements shall be subject to evaluation of the resolution authority based on the business model, funding sources and the risk profile of the institution.
Besides, we see any references to the leverage ratio in the RTS on MREL not appropriate before it becomes a Pillar 1 requirement in the European law.
If the level of 8% RWAs is not retained as a starting point in the final RTS, we suggest that Article 2 should ensure sufficient flexibility for the resolution authorities to decrease the loss absorption amount.
The determination of loss absorption amount should take into account different aspects, including the bank business model, its size, funding sources, deposit base, income diversification and volatility, the extent of trading activities. All these factors can decrease the amount of potential loss.
In question 1, we explained our standpoint that the minimum capital requirement should be used as the default level of the loss absorption. No additional benchmark should be used, as using other benchmarks while relating the loss absorption amount to capital requirements at the same time would question the appropriateness of capital adequacy requirements.
On the other hand, we fully support the Czech Banking Association requirement to perform a comprehensive analysis to confirm the appropriateness of the loss absorption amount setting for institutions of various sizes and business models, in line with Article 45, point 19(d) and (e) of Directive 2014/59/EU (BRRD), as well as the suggestion to study historical losses of financial institutions experienced during last years within this analysis. The study outcome should then be used to assess and possibly to properly calibrate LAA, for various sizes of institutions and for different business models.
We support the Czech Banking Association standpoint that the recapitalization amount should only include the minimum capital requirements, since the required capital buffers under Pillar 1 or capital requirements under Pillar 2 correspond to the situation before the resolution.
Additional capital increase after the resolution should be a matter of a time plan agreed with the competent authority.
Besides, the 8% level of total risk exposure as the recapitalization amount in resolution shall be estimated on the basis of the preferred resolution strategy and should reflect the likely decrease of RWAs in resolution.
Also, it seems reasonable to assume that the institution going through a resolution will have some equity left, as the regulators would use their powers before the capital is completely depleted. The recapitalization amount setting should take this fact into account as well.
We do not support the peer group approach in general, since it does not appear reasonable to require an institution immediately after a resolution to operate with capital levels at the median of its peer group. Actually, in our view, it can be perfectly understood that such an institution operates close to the minimum requirements first; it is rather crucial to establish and present a credible plan for re-establishing relevant capital buffers, and to periodically communicate on how this plan is being achieved during the period of restructuring.
Moreover, the market confidence is certainly not only about the level of capital adequacy, but also about perception of the quality of the bank’s management, credibility of the restructuring plan and the new business plan. We recommend the required level of capital in order to achieve sufficient market confidence after resolution to be determined by resolution authority on a case by case basis.
On top of the Czech Banking Association standpoint, we would like to point out that the MREL setting entities in a group – however it is clearly the intention of the BRRD to establish a sufficient MREL also at individual level – should be discussed within the Resolution College, as it may also be affected by the chosen resolution strategy. This goes in line with BRRD Article 45, paragraphs 9 and 10.
We would like to point out that (regardless the actual level of the threshold) the standard is unfortunately not specific about using the outcome of the calculations defined in Article 5. We would prefer a clarification in the RTS on conclusions to be drawn from such an analysis. We insist that there should be no automatic need to increase MREL or require the institution to fulfil MREL through contractual bail-in instruments; the outcome should be rather an additional piece of information to be assessed on case by case basis.
We agree on the point of the draft RTS to pay a special attention to systemic institutions and their MREL. However, we believe that the RTS should be clarified not to set an automatic need to increase MREL levels for SIIs (to 8% of liabilities and own funds) if application of other rules described by this RTS resulted in a lower amount. The BRRD does not provide that the MREL should be sufficient to call on the resolution fund nor that all SIIs should have the same minimum requirement. The resolution authority should be required to assess whether the resolution plan can credibly and feasibly be implemented without recourse to the resolution financing arrangements and, if this is the case, no increase of MREL should be required. We believe that setting a uniform minimum would not adequately reflect the different business models of SIIs. Moreover, we note that the 8% in BRRD Article 44 paragraph 5(a) refers to the total capacity of loss absorption and recapitalization, and not to MREL only as defined by this RTS.
We believe that at least 48 months transition period to comply with the requirement is necessary. We support the Czech Banking Association requirement to perform a comprehensive market analysis which would assess the market capacity to absorb the new eligible instruments in volumes required by this standard, in particular for issuers in jurisdictions where the senior unsecured market is not sufficiently developed. The limit on the transition period should be only confirmed following this study.
The restructuring plan of the institution should define how the institution intends to rebuild its capital and MREL, as well as the timeframe for implementation of this plan. Having said this, it is not necessary to set a specific transitional period – rather, this is a question of presenting and following the individual plan.
We fully support the Czech Banking Association conclusion that the draft RTS disproportionally affects banking sectors which are highly capitalized, and that it significantly penalizes particular business models – especially deposit funded banks focused on their core business (lending to domestic retail and corporate clients). Thus, the proposal neither adapts MREL to the business model of individual institutions, nor promotes consistency in MREL setting across resolution authorities.
Should the standard enter into force as-is, the MREL requirement for Czech D-SIBs could end up above 30% of RWA. This indicates significant competitive disadvantages to Czech banks rather than a consistent approach across the Union.
In our view, given the existing detailed proposal for setting the MREL, EBA is ignoring the monitoring period and a calibration process, assumed by Directive 2014/59/EU (BRRD) Article 45, paragraphs 19 and 20, during which the resolution authorities are expected to determine MREL of individual institutions based on the criteria in Articled 45 paragraph 6(a)-(f) reflecting the institutions’ size, business model, funding model and risk profile. We urge EBA to establish such a monitoring period and calibration process before the suggested rules enter into force.
In the meantime, the goal of a harmonization of the MREL requirement for similar institution should be achieved by giving sufficient flexibility to the resolution authorities to determine the MREL in a process of an intensive dialogue in the Resolution Colleges.
Based on Article 45, paragraph 19(i) of BRRD, EBA shall assess by October 2016 whether is it more appropriate to use institution’s risk-weighted assets instead of total liabilities and own funds as the denominator for the requirement. In line with the Czech Banking Association standpoint, we suggest EBA to conclude this assessment sooner and preferably to reflect it in the technical standard, to be consistent with the MREL assessment methodology proposed which is based on RWA. In addition, we believe that using RWA as the denominator would better reflect the economic reality and it also would bring practical advantages, detailed further in the Czech Banking Association response.