Response to consultation Paper on ITS on disclosure and reporting of MREL and TLAC
Go back
The presentation of eligible liabilities on the basis of carrying amount would have several disadvantages, notably because a presentation on this basis would mean that, for institutions using IFRS, revaluations of fair value hedged components would make the MREL/TLAC ratio sensitive to interest rate movements, whereas in reality the bank is hedging its interest rate risk in the banking book in order to respect limits laid down by policy (RAF, ICAAP…).
.
It could be argued that the carrying amount of eligible liabilities is a better depiction of the accounting impacts of a bail-in, but this would not necessarily give a more accurate picture:
• The scope of instruments eligible to bail-in is larger than the scope of instruments eligible to the numerator of the ratio of MREL/TLAC;
• The MREL/TLAC ratio is above all a metric enabling measurement of the loss absorbency capacity of an institution. However this metric is monitored on a going-concern basis, as are the management of institutions or the principles of financial reporting;
• If an entity enters into resolution, many other elements will affect the structure of its balance sheet and the amount of losses to be absorbed, such as the impact of hedges on instruments, accrued interest due in the next 7 days, assets being sold at market value rather than accounting value, etc.;
• The outstanding nominal value of the instruments has at least the merit of reflecting the amount of the claim which the creditor could file under insolvency proceedings whatever the applicable accounting framework.
Template:
M 07.00: Paragraph 45 of the consultation paper “EBA-CP-2019-14” states that “The BRRD2 requires institutions to report whether the own funds, eligible liabilities and other bail-inable liabilities are governed by third country law and contain contractual write down and conversion clauses pursuant to Article 55 BRRD, Article 52 CRR and Article 63 CRR”. To be consistent with reporting “M 07.00 - Instruments governed by third-country law (MTCI)”, paragraph 45 of the consultation paper should be amended and aligned with the instructions of Annex II of the consultation paper, stating reporting requirements on instruments governed by third-country law (i.e. reporting M 07.00) focus on own funds and eligible liabilities only.
Standardised ranking (Annex IV): It is not clear whether the institutions are expected to report this template. We understand that it should be provided by the Resolution Authority (RA) but do institutions have to include it in its reporting set of templates? If it is the case, what is the frequency of this reporting?
Furthermore, as RA are involved in this report, and the Consultation mentions the SRB guidance on insolvency rankings provided for the LDR (page 19), we would like to make the EBA aware of some facts:
o The SRB gives this information in the disclaimer of its insolvency ranking annexe: “This annex is for informative purposes only and shall neither be binding nor construed as constituting a commitment or an interpretation by the SRB or by the national resolution authorities. This annex contains a general and simplified overview of the national legal frameworks concerning the insolvency ranking of liabilities, which is not intended to be comprehensive or exhaustive and which was prepared for the sole purpose of providing assistance when completing the LDT. This annex shall not be used without checking the primary sources. (…)”
Consequently, we would appreciate that the SRB shows more confidence in this document and confirms that it can be used as a reference for reporting and disclosure (and not just for the LDR).
If resolution authorities are not capable of providing reliable insolvency hierarchies, banks can hardly be expected to do so on an individual basis.
o There is a difference of format between the “annex 3” provided by the SRB and the EBA template. We would appreciate an alignment on the format to avoid an additional report for entities as stated in the Consultation (page 19) “Resolution authorities are asked to compile the relevant information in that standardised format and make it available to entities subject to the BRRD under their jurisdiction and supervision.”
We also take the opportunity of this Consultation to ask that insolvency hierarchies provided by Resolution Authorities should be sufficiently detailed to allow classification of all liabilities. In this respect, the hierarchy provided by SRB could be improved.
Instructions:
Definition of the outstanding amount: Institutions would welcome the inclusion in the final version of the Technical standard of a definition of the “outstanding amount”, by each type of products.
Resolution group: We call upon resolution authorities to formally notify institutions of the entities they consider to be part of resolution groups. The number of material subsidiaries with dedicated reporting requirement should be limited to the most important institutions of resolution groups.
Entities that are not themselves resolution entities: The present consultation does not restrict the scope of entities that are subject to reporting requirements; however, Article 45i(1) of BRRD indicates that reporting obligations apply to entities subject to the requirement referred to in Article 45(1), i.e. entities that are subject to MREL requirements. Consequently, it would be useful that the draft ITS specifies the same scope, and consequently alleviates entities not subject to MREL requirement from reporting obligations.
Interaction with existing reporting requirements: Institutions urge the EBA to set up an efficient framework that does not require the reporting of the same data in different templates. Moreover, most of the requested information are already reported in the LDR or LIAB reports. The interactions between the LDR and the current reporting should be explicitly mentioned. In particular, we call the EBA to list under dedicated instructions the various data quality controls (i.e. same data in different reporting templates) that should be realized by institutions between the current set of reporting proposed by the EBA and the LDR template and/or to provide mapping table between the different reporting templates.
Quantitative tool to assess the NCWOL: We understand from discussions with the Single Resolution Board (SRB) during the 9th industry dialogue, that a quantitative tool will be set up to assess the No Creditor Worse Off than in Liquidation principle (NCWOL) of institutions. We call for synergies between the templates proposed by the EBA under consultation paper EBA-CP-2019-14 and the tools the SRB plans to develop to assess NCWOL. In that context, paragraphs 18 and 19 (page 10 of the Consultation) are worrying concerning the usefulness of the LIAB template. We do not know if this quantitative tool is a new report, or if it will be fed by the LIAB?
In addition, to justify why the choice has been made not to leverage on the LIAB template, the EBA mentions in the Consultation (page 10) “differences and incompatibilities in terms of content and some of the terminology used.”
It would be highly appreciated that EBA describes specifically these differences of terminology. Could EBA explain why it is said that LIAB “does not differentiate between counterparties within and those outside the resolution group“, whereas SRB, in its LDR guidance, requires that the reporting be produced on the resolution group basis.
Row 360: EBA should clarify this calculation detailed in the instructions (Annex 2) as they mention the application of a cap when referring to Article 72b(4) of Regulation (EU) 2019/876. Yet the latter does not indicate a cap on the amount of unsubordinated liabilities that could be included in own funds and eligible liabilities but indicates a condition of 5% of excluded liabilities ranking pari passu or below eligible liabilities, and if this condition is satisfied, unsubordinated liabilities can be included, without any cap. The formula given by the EBA in Annex 2 should be amended to reflect the difference between Article 72b(3) and 72b(4) of Regulation (EU) 2019/876.
In Annex 2, page 5, column 0010 (“MREL”): Please correct the regulatory reference with BRRD Article 45e, which specifies MREL requirements for resolution entities.
In Annex 2, page 6, row 0250 (« Other bail-inable liabilities ») for MREL (column 0010): instructions indicate that this field corresponds to the difference between:
• The liabilities not excluded from bail-in as reported in {r0300, c0190} of template Z 02.00 of Annex I to Regulation (EU) No 2018/1624 (ITS on Resolution Planning Reporting) However, column c0190 does not exist in template Z 02.00; a correction appears necessary
and
• The eligible liabilities as reported in {r0050, c0020} of template M 02.00 of Annex I to this draft ITS. However, this cell is fulfilled for the TLAC purpose; hence, for consistency purpose, we suggest to correct the reference by {r0050, c0010}, which applies to MREL.
Clarification requested in the title of templates:
The titles of disclosure templates are clearer than the title of reporting templates. We call for a revision of the title of the reporting templates.
Some examples:
Reporting template: “M 03.00 - Internal MREL and Requirement for own funds and eligible liabilities for non-EU G-SIIs (ILAC)”
Disclosure template: “EU ILAC 1 – internal MREL and, “where applicable”, the G-SII Requirement for own funds and eligible liabilities”
TLAC 1:
Row 110: More detailed instructions are needed on the way to complete row “0110 - Tier 2 instruments with a residual maturity of at least one year to the extent they do not qualify as Tier 2 items”. In particular, more detailed instructions on the way T2 instruments with a residual maturity <1 year should be taken into account (deducted in that cell?) to ensure clarity and consistency among reporting institutions.
Row 150 and 160: As articles 72b(3) and 72b(4) of Regulation (EU) 2019/876 are mutually exclusive, it should be written “amounts eligible, where applicable after application of Articles 72b (3) or (4) CRR” (instead of “Articles 72b (3) and (4) CRR”).
Row 190: Could you confirm institutions should deduct from row “0190 - (-) Investments in other eligible liabilities instruments” the eligible liabilities they issued or another G-SII issued, only for the reporting of their TLAC (i.e. not for the reporting of their MREL)?
Row 310 to 330: We do not understand the rational for reporting these rows and it is all the more incomprehensible that the MREL column is expected to be reported. The row 310 “investments in subordinated EL of G-SIIs” should be equal to row 190 regarding the deductions of “Investments in other eligible liabilities instruments”.
With regard to rows 320 (investments in subordinated EL of O-SIIs) and 330 (Investments in subordinated EL of other institutions), we do not understand what purpose could be served by reporting these rows. As they do not correspond to any regulatory (Level 1 text) requirement and would represent an additional work for institutions, we kindly ask the EBA to remove these rows.
We are perfectly aware that the EBA is mandated by the Commission (art. 504a of Regulation (EU) 2019/876) to produce a report on “ the amounts and distribution of holdings of eligible liabilities instruments among institutions identified as G-SIIs or O-SIIs and on potential impediments to resolution and the risk of contagion in relation to those holdings”. However, this information does not need to go through a regular quarterly report as it is not mandated by the Level 1 text. It would be better transmitted by the institutions to the EBA by the means of an ad-hoc report at that time at which the EBA is working on this report.
TLAC 2: To ensure an appropriate completion of the reporting template “TLAC 2: M 05.00 - Creditor ranking (entity that is not a resolution entity) (TLAC2)”, it should be confirmed TLAC2 is only required for entities with internal MREL requirement.
TLAC 3: In “TLAC 3 - M 06.00 - Creditor ranking (resolution entities and groups) (TLAC3)”, could you confirm it doesn’t make sense to report creditor ranking at the group level (implying different Member states). In our opinion, data should be reported at the level of all point of entry (whatever a MPE or a SPE strategy) situated within the perimeter of the European Union. Data should be reported at the level of each “resolution entity” as explained in the Table 2 of the consultation paper (cf. page 12) and not at the level of the “resolution entities and groups” (i.e. the title of the TLAC3 template is misleading).
Q1. The proposed standards would measure own funds in terms of carrying amounts and eligible liabilities in terms of out-standing nominal amounts. This approach aligns the reporting and disclosure on MREL/TLAC with the reporting in the context of the ITS on Resolution Planning Reporting, where the same measurement basis is used. In contrast, presenting both the amount of own funds and eligible liabilities as carrying amounts would potentially align the reporting more with the vast majority of prudential reporting and disclosure requirements and with the internal approaches of institutions for the monitoring of MREL/TLAC compliance on a daily basis. There is also ongoing work at the level of the BCBS to clarify the measurement of non-equity capital. What are the advantages and challenges of presenting MREL/TLAC figures, and in particular the amount of eligible liabilities, on the basis of a) outstanding amounts or b) carrying amounts for the purposes of reporting (and disclosure)?
We agree that eligible liabilities would be best measured in terms of outstanding nominal amount.The presentation of eligible liabilities on the basis of carrying amount would have several disadvantages, notably because a presentation on this basis would mean that, for institutions using IFRS, revaluations of fair value hedged components would make the MREL/TLAC ratio sensitive to interest rate movements, whereas in reality the bank is hedging its interest rate risk in the banking book in order to respect limits laid down by policy (RAF, ICAAP…).
.
It could be argued that the carrying amount of eligible liabilities is a better depiction of the accounting impacts of a bail-in, but this would not necessarily give a more accurate picture:
• The scope of instruments eligible to bail-in is larger than the scope of instruments eligible to the numerator of the ratio of MREL/TLAC;
• The MREL/TLAC ratio is above all a metric enabling measurement of the loss absorbency capacity of an institution. However this metric is monitored on a going-concern basis, as are the management of institutions or the principles of financial reporting;
• If an entity enters into resolution, many other elements will affect the structure of its balance sheet and the amount of losses to be absorbed, such as the impact of hedges on instruments, accrued interest due in the next 7 days, assets being sold at market value rather than accounting value, etc.;
• The outstanding nominal value of the instruments has at least the merit of reflecting the amount of the claim which the creditor could file under insolvency proceedings whatever the applicable accounting framework.
Q2. Are the scope and level of application of the reporting requirement and the content of the templates and the instructions M 01.00 to M 07.00 clear and appropriate?
Banks consider the templates and the instructions M 01.00 to M 07.00 should be amended as follows:Template:
M 07.00: Paragraph 45 of the consultation paper “EBA-CP-2019-14” states that “The BRRD2 requires institutions to report whether the own funds, eligible liabilities and other bail-inable liabilities are governed by third country law and contain contractual write down and conversion clauses pursuant to Article 55 BRRD, Article 52 CRR and Article 63 CRR”. To be consistent with reporting “M 07.00 - Instruments governed by third-country law (MTCI)”, paragraph 45 of the consultation paper should be amended and aligned with the instructions of Annex II of the consultation paper, stating reporting requirements on instruments governed by third-country law (i.e. reporting M 07.00) focus on own funds and eligible liabilities only.
Standardised ranking (Annex IV): It is not clear whether the institutions are expected to report this template. We understand that it should be provided by the Resolution Authority (RA) but do institutions have to include it in its reporting set of templates? If it is the case, what is the frequency of this reporting?
Furthermore, as RA are involved in this report, and the Consultation mentions the SRB guidance on insolvency rankings provided for the LDR (page 19), we would like to make the EBA aware of some facts:
o The SRB gives this information in the disclaimer of its insolvency ranking annexe: “This annex is for informative purposes only and shall neither be binding nor construed as constituting a commitment or an interpretation by the SRB or by the national resolution authorities. This annex contains a general and simplified overview of the national legal frameworks concerning the insolvency ranking of liabilities, which is not intended to be comprehensive or exhaustive and which was prepared for the sole purpose of providing assistance when completing the LDT. This annex shall not be used without checking the primary sources. (…)”
Consequently, we would appreciate that the SRB shows more confidence in this document and confirms that it can be used as a reference for reporting and disclosure (and not just for the LDR).
If resolution authorities are not capable of providing reliable insolvency hierarchies, banks can hardly be expected to do so on an individual basis.
o There is a difference of format between the “annex 3” provided by the SRB and the EBA template. We would appreciate an alignment on the format to avoid an additional report for entities as stated in the Consultation (page 19) “Resolution authorities are asked to compile the relevant information in that standardised format and make it available to entities subject to the BRRD under their jurisdiction and supervision.”
We also take the opportunity of this Consultation to ask that insolvency hierarchies provided by Resolution Authorities should be sufficiently detailed to allow classification of all liabilities. In this respect, the hierarchy provided by SRB could be improved.
Instructions:
Definition of the outstanding amount: Institutions would welcome the inclusion in the final version of the Technical standard of a definition of the “outstanding amount”, by each type of products.
Resolution group: We call upon resolution authorities to formally notify institutions of the entities they consider to be part of resolution groups. The number of material subsidiaries with dedicated reporting requirement should be limited to the most important institutions of resolution groups.
Entities that are not themselves resolution entities: The present consultation does not restrict the scope of entities that are subject to reporting requirements; however, Article 45i(1) of BRRD indicates that reporting obligations apply to entities subject to the requirement referred to in Article 45(1), i.e. entities that are subject to MREL requirements. Consequently, it would be useful that the draft ITS specifies the same scope, and consequently alleviates entities not subject to MREL requirement from reporting obligations.
Interaction with existing reporting requirements: Institutions urge the EBA to set up an efficient framework that does not require the reporting of the same data in different templates. Moreover, most of the requested information are already reported in the LDR or LIAB reports. The interactions between the LDR and the current reporting should be explicitly mentioned. In particular, we call the EBA to list under dedicated instructions the various data quality controls (i.e. same data in different reporting templates) that should be realized by institutions between the current set of reporting proposed by the EBA and the LDR template and/or to provide mapping table between the different reporting templates.
Quantitative tool to assess the NCWOL: We understand from discussions with the Single Resolution Board (SRB) during the 9th industry dialogue, that a quantitative tool will be set up to assess the No Creditor Worse Off than in Liquidation principle (NCWOL) of institutions. We call for synergies between the templates proposed by the EBA under consultation paper EBA-CP-2019-14 and the tools the SRB plans to develop to assess NCWOL. In that context, paragraphs 18 and 19 (page 10 of the Consultation) are worrying concerning the usefulness of the LIAB template. We do not know if this quantitative tool is a new report, or if it will be fed by the LIAB?
In addition, to justify why the choice has been made not to leverage on the LIAB template, the EBA mentions in the Consultation (page 10) “differences and incompatibilities in terms of content and some of the terminology used.”
It would be highly appreciated that EBA describes specifically these differences of terminology. Could EBA explain why it is said that LIAB “does not differentiate between counterparties within and those outside the resolution group“, whereas SRB, in its LDR guidance, requires that the reporting be produced on the resolution group basis.
Q3. Do you see any discrepancies between these templates and instructions and the requirements set out in the underlying regulation, i.e. do these templates and instructions reflect the substance of the TLAC requirement and MREL in a proper manner? Do you agree that the proposed reporting requirement is fit for purpose?
KM2:Row 360: EBA should clarify this calculation detailed in the instructions (Annex 2) as they mention the application of a cap when referring to Article 72b(4) of Regulation (EU) 2019/876. Yet the latter does not indicate a cap on the amount of unsubordinated liabilities that could be included in own funds and eligible liabilities but indicates a condition of 5% of excluded liabilities ranking pari passu or below eligible liabilities, and if this condition is satisfied, unsubordinated liabilities can be included, without any cap. The formula given by the EBA in Annex 2 should be amended to reflect the difference between Article 72b(3) and 72b(4) of Regulation (EU) 2019/876.
In Annex 2, page 5, column 0010 (“MREL”): Please correct the regulatory reference with BRRD Article 45e, which specifies MREL requirements for resolution entities.
In Annex 2, page 6, row 0250 (« Other bail-inable liabilities ») for MREL (column 0010): instructions indicate that this field corresponds to the difference between:
• The liabilities not excluded from bail-in as reported in {r0300, c0190} of template Z 02.00 of Annex I to Regulation (EU) No 2018/1624 (ITS on Resolution Planning Reporting) However, column c0190 does not exist in template Z 02.00; a correction appears necessary
and
• The eligible liabilities as reported in {r0050, c0020} of template M 02.00 of Annex I to this draft ITS. However, this cell is fulfilled for the TLAC purpose; hence, for consistency purpose, we suggest to correct the reference by {r0050, c0010}, which applies to MREL.
Clarification requested in the title of templates:
The titles of disclosure templates are clearer than the title of reporting templates. We call for a revision of the title of the reporting templates.
Some examples:
Reporting template: “M 03.00 - Internal MREL and Requirement for own funds and eligible liabilities for non-EU G-SIIs (ILAC)”
Disclosure template: “EU ILAC 1 – internal MREL and, “where applicable”, the G-SII Requirement for own funds and eligible liabilities”
TLAC 1:
Row 110: More detailed instructions are needed on the way to complete row “0110 - Tier 2 instruments with a residual maturity of at least one year to the extent they do not qualify as Tier 2 items”. In particular, more detailed instructions on the way T2 instruments with a residual maturity <1 year should be taken into account (deducted in that cell?) to ensure clarity and consistency among reporting institutions.
Row 150 and 160: As articles 72b(3) and 72b(4) of Regulation (EU) 2019/876 are mutually exclusive, it should be written “amounts eligible, where applicable after application of Articles 72b (3) or (4) CRR” (instead of “Articles 72b (3) and (4) CRR”).
Row 190: Could you confirm institutions should deduct from row “0190 - (-) Investments in other eligible liabilities instruments” the eligible liabilities they issued or another G-SII issued, only for the reporting of their TLAC (i.e. not for the reporting of their MREL)?
Row 310 to 330: We do not understand the rational for reporting these rows and it is all the more incomprehensible that the MREL column is expected to be reported. The row 310 “investments in subordinated EL of G-SIIs” should be equal to row 190 regarding the deductions of “Investments in other eligible liabilities instruments”.
With regard to rows 320 (investments in subordinated EL of O-SIIs) and 330 (Investments in subordinated EL of other institutions), we do not understand what purpose could be served by reporting these rows. As they do not correspond to any regulatory (Level 1 text) requirement and would represent an additional work for institutions, we kindly ask the EBA to remove these rows.
We are perfectly aware that the EBA is mandated by the Commission (art. 504a of Regulation (EU) 2019/876) to produce a report on “ the amounts and distribution of holdings of eligible liabilities instruments among institutions identified as G-SIIs or O-SIIs and on potential impediments to resolution and the risk of contagion in relation to those holdings”. However, this information does not need to go through a regular quarterly report as it is not mandated by the Level 1 text. It would be better transmitted by the institutions to the EBA by the means of an ad-hoc report at that time at which the EBA is working on this report.
TLAC 2: To ensure an appropriate completion of the reporting template “TLAC 2: M 05.00 - Creditor ranking (entity that is not a resolution entity) (TLAC2)”, it should be confirmed TLAC2 is only required for entities with internal MREL requirement.
TLAC 3: In “TLAC 3 - M 06.00 - Creditor ranking (resolution entities and groups) (TLAC3)”, could you confirm it doesn’t make sense to report creditor ranking at the group level (implying different Member states). In our opinion, data should be reported at the level of all point of entry (whatever a MPE or a SPE strategy) situated within the perimeter of the European Union. Data should be reported at the level of each “resolution entity” as explained in the Table 2 of the consultation paper (cf. page 12) and not at the level of the “resolution entities and groups” (i.e. the title of the TLAC3 template is misleading).