The EBA published today its final Report on the implementation and design of the minimum requirement for own funds and eligible liabilities (MREL). The Report quantifies the current MREL stack and estimates potential financing needs of European Union (EU) banks under various scenarios. It also assesses the possible macroeconomic costs and benefits of introducing MREL in the EU. Finally, the Report recommends a number of changes to reinforce the MREL framework and integrate the international standards on total loss-absorbing capacity (TLAC) in the EU's MREL.
The Report is addressed to the European Commission, which issued its banking reform package on 23 November 2016. The European Parliament and Council will deliberate on this package in the coming months and the Report will shed light on a number of technical issues still open for discussion.
Under central estimates, the Report assesses that the financing needs 133 banking groups included in a representative sample would have to meet in order to comply with an assumption-based MREL requirement in the steady phase would range between EUR 186bn and EUR 276bn. Moreover, subject to the assumptions used in the Report, the net macro-economic impact of introducing MREL in the EU is positive and ranges between 17 and 91 basis points of GDP.
The EBA makes a number of recommendations aimed at improving the EU MREL framework to best deliver on the main objectives of the bank resolution reform, namely preserving financial stability, addressing the too-big-to-fail problem and breaking the sovereign-bank nexus. The Report promotes a technically sound implementation of international standards as part of an integrated EU framework in order to avoid banks being faced with two sets of rules.
The recommendations include, inter alia, the following key elements:
Reaffirming resolution strategies as the primary driver of MREL calibration
MREL should respect the minimum quantitative requirements laid down in the TLAC term sheet for global systemically important banks (G-SIBs) but should also deliver on the resolution strategy for each firm. Therefore, for G-SIBs, MREL should be set as the higher of minimum quantitative requirements and the amount necessary to meet the resolution strategy of any specific firm.
Enhancing resolvability by introducing mandatory subordination requirements
G-SIBs should be subject to a partial subordination requirement of at least 14.5% of RWAs, in line with the Financial Stability Board (FSB) TLAC term sheet. Other systemically important institutions (O-SIIs) could be subject to a partial subordination requirement of 13.5% of risk weighted assets (RWAs) with some flexibility to cater for market capacity and differences in resolution strategies.
Improving consistency between MREL and capital requirements
MREL requirements should be expressed as a percentage of RWAs, with a leverage ratio exposure backstop. In order to preserve the usability of capital buffers, CET1 should be prevented from counting towards MREL and capital buffers at the same time. Suggestions are provided to clarify the stacking order between MREL and capital buffers, avoiding that a breach of the MREL requirement can immediately and automatically lead to constraints to distributions.
Enhancing transparency to support market discipline and facilitate the emergence of a market for MREL instruments
Credit institutions should be required to disclose MREL requirements and stacks in the steady phase. During the transitional phase of MREL build-up, they should be required to disclose at least MREL stacks and information on the creditor hierarchy.
This final MREL report has been drafted in accordance with Articles 45(19) and (20) of the BRRD, which mandate the EBA to deliver a report on the implementation of MREL to the European Commission by 31 October 2016. The EBA submitted an interim report to the Commission on 19 July 2016 in order to provide timely input into the Commission's legislative proposal on loss absorbing and recapitalisation capacity.
Notes to editors
MREL is a requirement for a bank to hold a sufficient amount of own funds and debt instruments of a certain quality in order to absorb losses and recapitalise its critical functions in case of failure. This requirement is to be set for each bank by the relevant resolution authorities in line with the BRRD and regulatory standards developed by the EBA in 2015.
MREL is an essential complement to ensure the effective application of the bail-in mechanism, as laid down by the BRRD. Bail-in ensures that the costs of a bank's failure are borne, first and foremost, by shareholders and creditors rather than taxpayers. Bail-in became applicable in all EU Member States as of 1 January 2016 and resolution authorities are working to progressively set MREL requirements as part of the ongoing resolution planning process.
Total loss-absorbing capacity is a regulatory standard introduced by the FSB in November 2015. It is applicable to G-SIBs and pursues the same objectives as MREL, i.e. ensuring sufficient loss-absorbing and recapitalisation capacity when resolving a bank. The FSB term