The European Banking Authority (EBA) has launched today a public consultation on its interim report on the implementation and design of the minimum requirement for own funds and eligible liabilities (MREL). The interim report is addressed to the European Commission, and it will inform a future legislative proposal on the implementation of the Financial Stability Board's "total loss-absorbing capacity" (TLAC) standard in the EU and the review of MREL. Further elements will be covered in the EBA's final report which will be provided to the European Commission by 31 October 2016.
The interim report contains a number of provisional recommendations, in particular:
changing the reference base of the MREL requirement from total liabilities and own funds to risk-weighted assets with, in time, a leverage exposure backstop;
preventing CET1 instruments from counting both towards capital buffers and MREL, while considering the implications on "maximum distributable amounts" (MDA) triggers;
extending and enhancing the existing powers available to address breaches of MREL;
in calibrating MREL, specific business models may be worth considering to the extent that they lead to differences in resolution strategies. Calibration should in all cases be closely linked to and justified by the institution-specific resolution strategy;
introducing mandatory subordination for at least some banks, while more generally enhancing transparency and disclosure for all creditors on the creditor hierarchy; and
streamlining the requirement to include international recognition clauses in contracts giving rise to "bail-inable" liabilities.
Preliminary quantitative findings on the financing capacity and needs of EU banking groups are also available in the interim report. These findings are however subject to several methodological caveats and should be read in their context. In the absence of MREL decisions for institutions to date, and given the limited information related to the resolution authorities' MREL policy approach, the EBA was required to make assumptions on the likely scope and calibration of MREL. These assumptions are by definition different from the actual levels of MREL which will ultimately be determined by resolution authorities in relation to each institution and group.
Legal background and next steps
This interim 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 report must cover a number of areas, including proposals on appropriate adjustments to the parameters of the minimum requirement, and consistency with international standards.
The European Commission has committed to bringing forward a combined legislative proposal implementing the FSB's TLAC standard in the European Union and reviewing MREL, by the end of 2016. In order to provide timely input into the European Commission's deliberations and to gather input from other stakeholders, the EBA has issued this interim report ahead of the mandated final report. The interim report does not cover all of the items in the BRRD mandate for the MREL report; additional elements will be covered in the final report.
Stakeholders are invited to send their answers to the questions included in the interim report to firstname.lastname@example.org
, by Tuesday 30 August 2016.
Notes to editors
MREL is an essential complement to the bail-in mechanism, as laid down by the Bank Recovery and Resolution Directive (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.
MREL consists of own funds and debt with certain qualities that would be written down and converted into equity when required. This requirement is to be set for each bank by the relevant resolution authorities, in line with the BRRD and regulatory standards which have been developed by the EBA in 2015 and recently endorsed by the European Commission. MREL ensures that sufficient capital and debt instruments are available to absorb the losses of a failing institution and to recapitalise its critical functions.
Bail-in became applicable in all EU Member States as of 1 January 2016 and resolution authorities are working to progressively set MREL as part of the ongoing resolution planning process.