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European Savings and Retail Banking Group

ESBG proposes to first focus on the capital requirement stated in Article 2(2)(a) draft RTS to approximate the loss absorption amount. These figures are risk based and reflect in the best way the individual risk profile of the respective institutes based on common rules defined in the CRR.

Despite the fact that, in theory, the inclusion of the capital requirements stated in Article 2(2)(b) and (c) draft RTS would factor in other relevant aspects of prudential supervision, it cannot be excluded that the actual application of such capital requirements in different jurisdictions might lead to arbitrary requirements – based on the different supervisory authorities’ risk aversion or macro-prudential approach – and that a level playing field might not be achieved.

The “Basel I floor” and the “leverage ratio requirement” as stated in Article 2(2)(d) and (e) draft RTS are nominal back-stop measures and are non-optimal indicators for loss in resolution of an institute.
ESBG prefers that paragraph 5 refers to the resolution authority adjusting the loss absorption amount. In any case, we assume that such an adjustment will – preferably – be a “fine-tuning” of the loss absorption amount, thus not leading to continuous modifications.

We assume that adjust is the right wording and EBA should stick to that version of the text. A fixed floor would have the advantage of a level playing field. However, the current draft is more flexible and allows for considerations of individual economic factors. If the risk of a “bail-out” in a crisis situation could be banned after the assessment of the resolution authority with reduced capital requirements, then a reduction in a loss absorption amount would be appropriate, in our opinion.

Based on the fact that the draft RTS do not mention the frequency of the assessments of the loss absorption amount, which is done by the resolution authority, ESBG would moreover like to ask the EBA whether the assumption is correct that these assessments will be made at the same time as the drawing up and updating of the resolution plans.
The principle of proportionality should be taken into consideration when determining the recapitalisation amount. The idea of Article 3(2) draft RTS is appropriate – a recapitalisation amount could even be set at “0”. If the resolution authority comes to the conclusion that there is no public interest in a resolution of the institution (see EBA/CP/2014/16), this result should be taken into account not only for determining the recapitalisation amount but also for determining the MREL. If the resolution authority concludes that there is no public interest for a resolution, the determination of the MREL above “0” should – if at all – only have a symbolic character.

ESBG proposes that the EBA avoids the duplication of both the Pillar 2 requirements and the combined capital buffer requirements (CBR) when determining the level of eligible liabilities. We understand that the post-resolution institution would bear different and lower risks than those borne by the original institution. In particular, both the current Pillar 2 requirements and the CBR could not apply. The requirements of a post-resolution institution should be adequate to its characteristics. This does not mean that it could be subject to capital distribution restrictions.

The recapitalisation amount should not be determined in isolation and not additively to the “loss absorption amount”. Rather, the resolution authority should consider an appropriate recapitalisation level post resolution and upon implementation of the specific resolution plan. Especially the reduction in capital demand due to the usage of resolution tools should be taken into account.

The MREL requirement set by the resolution authority should consider the aggregate effect of losses, which reduces the risk weighted assets, occurring up to resolution, following potential earlier recovery measures (e.g. sale of subsidiaries), the then remaining capitalisation and additional downside at entry point of resolution.

In opposition to the identification of the “loss absorption amount”, the “Basel I floor” and the “leverage ratio” are proper indicators to estimate the recapitalisation amount. The recapitalisation amount has to be sufficiently high that the institute can comply with all regulatory requirements.

With respect to Article 3(7)(a) draft RTS ESBG understands that the EBA has an interest that capital requirements listed in Article 3(6) draft RTS following recapitalisation should be met and that the resulting institution should also meet its combined capital requirements. However, we question whether, immediately following resolution, a “buffer on the buffer” as outlined in Article 3(7)(b) draft RTS should be met. Rather, such a “sufficient market confidence buffer” (if individually necessary) should be built up via further retained earnings over a transition period after the resolution action. It is the foremost objective of the specific resolution action itself to create required market confidence for the resulting institution by appropriate de-risking (following asset valuation) and recapitalisation in line with the CRR/CRD IV requirements.
ESBG does not agree with a de minimis derogation from this provision for excluded liabilities to simplify the process, if this leads to a de facto exclusion of senior unsecured bonds as MREL eligible instruments. In such a case a de minimis derogation could lead to significant market intervention due to a de facto exclusion of the current stock of senior unsecured bonds as MREL eligible instruments. In ESBG’s view, that was not intended by the BRRD.
According to Article 7(2) draft RTS the resolution authority has ample room for discretion when determining the MREL for G-SIIs and O-SIIs. In ESBG’s opinion, this discretion is too far-reaching. If such a special treatment was introduced, there should be clearly pre-defined criteria or even quotas in place which would have to be taken into account by the resolution authority when determining the MREL. Furthermore, the aforementioned discretion should only be considered for O-SIIs, as for G-SIIs the probability of using means of the resolution fund is there in any case.
ESBG agrees that it is fundamental to establish an appropriate transitional period in order to give institutions enough time to issue new capital requirements with bail-in features and replace current instruments where necessary.

However, we suggest that the EBA considers introducing a transitional period for the MREL which is similar to the transitional period regarding the filling up of the Single Resolution Fund. In particular with regard to institutions without access to capital markets, a transitional period of 48 months could be too short. A period of at least 72 months would be appropriate.

Finally, ESBG believes that the EBA could consider linking any transitional period not only to the institution’s individual situation, but also to regional circumstances (e.g. advancement in size and quality of necessary regional capital market).
Sebastian Stodulka
+3222111162