Response to consultation on RTS on minimum requirement for own funds and eligible liabilities (MREL)
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a. measures that may ensure loss allocation to other stakeholders (e.g. guarantees, commitments, insurance, contractual liability limitations). Such measures would allow a higher loss amount to be absorbed before entry in resolution. It would be inadequate if the expected MREL for loss absorption purposes would be identical for institutions facing similar initial amounts at risk, but with very different risk absorption measures. This is particularly true for FMIs; and
b. the risk profile of the institution, including its history of losses and recapitalisation events, as well as any other regulatory frameworks it must comply with. Resolution authorities should be able to decrease the loss absorption amount to take into account the fact that CSDs with a banking license should be treated differently based on their special role in the market, different risk profile and distinct regulatory framework.
They also show which recovery measures would need to fail before entry in resolution. In that sense, they are an indicator of the overall risk appetite of institutions and of resolution authorities. The easier resolution – the more acceptable it may be to let an institution fail. The lower the institutions’ risk appetite in terms of resistance to stress events (taking into account all loss-absorption and risk transfer measures) – the lower any MREL requirements should be.
• The timing by which such capital should be available leads to very different conclusions as to the amount of capital needed. The paper implicitly assumes that it is immediately after the “resolution weekend” and that the relevant “bail-inable” liabilities should be part of resources that need to be immediately available for stabilisation purposes. This is emphasised by the mention that any changes to the capital needed for complying with authorisation requirements should reflect the post-resolution situation but without “adversely affecting the provision of critical functions by the institution”.
However, the resolution process may lead to a transfer or sale, or even to an orderly wind-down of some activities that are deemed critical for the market, over a period of time. This means that on Monday morning, the institution may well be required to re-open and offer such activities itself, but transfer them or close them down over the course of several months. Does it mean that the full recapitalisation requirement for MREL should be applicable? Or that a lower amount could do, with the perspective that some activities may be sold/transferred/wound down? We believe the latter, as capital should only be needed to support the institution’s activities in a steady state.
This argument is particularly true for ICSDs. Most of ICSDs’ activities are critical. However, winding-down is not unthinkable, provided sufficient time is available to ensure an orderly transfer of participant cash, assets and business to alternative providers.
• Furthermore, the requirement for a recapitalisation amount is particularly inappropriate for ICSDs in view of other regulatory requirements applicable to them. Indeed, CSDs are required to establish an orderly wind-down plan and to maintain procedures ensuring the timely and orderly settlement and transfer of participants’ assets to another CSD in the event of a withdrawal of authorisation (art. 20.5 of CSD regulation), and to hold sufficient amounts of capital to make such a wind-down possible under the CSD regulation (art. 47 of CSD regulation). Forced recapitalisation is at odds with the wind-down requirement.
• Finally, and though we believe this argument to be stronger for FMIs than for other institutions, it remains applicable to all: if the market does not recapitalise an institution (if it is unable to raise capital before resolution), would that not mean that the market does not support a return to viability of this precise infrastructure? Then, why should recapitalisation be forced ex ante upon the market? Would it not create moral hazard and disincentivise support in recovery?
In view of the preceding points, we believe that the recapitalisation amount, if any, should be based on the resolution strategy and on the resolvability assessment. It should be the lowest of:
• The amount necessary to conduct the business in the least capital-intensive way during the resolution process. For example, in the case of Euroclear Bank, capital requirements are mainly driven by intraday credit provision to participants. In resolution, this source of risk would likely be reduced, automatically leading to lower capital requirements.
• The amount necessary in the new steady state, taking into account the shape of the institution after resolution has been completed, including any transfer/sale/wind-down of business that may take place, which may entail the closing down of critical activities over time.
Due to that major drawback, we do not believe that this approach should be extended in a mechanical way (i.e. forcing authorities to match a median) for other types of institutions. We nevertheless acknowledge that comparisons are informative and we encourage authorities to share information in that respect to ensure a level-playing field. This should not prevent authorities from taking into account the specificities of the institutions under consideration. For example, any set of O-SIIs (domestic or cross-border) would be rather different from Euroclear Bank, which, as an FMI, should only be benchmarked against similar types of institutions.
However, by adding up a loss absorption and a recapitalisation amount, and assuming that such recapitalisation amount should be set such as not to disrupt the provision of critical activities, the draft RTS may encourage authorities to set an excessively conservative MREL, in particular for FMIs.
This could force institutions to issue bail-inable liabilities they do not need. For example, even though Euroclear Bank has a capital ratio of some 40%, a strict interpretation of the draft RTS may lead to a doubling of the requirements in terms of eligible liabilities and own funds. Would it be reasonable for Euroclear Bank to issue large amounts of debt that it does not need for the purpose of conducting its business?
Finally, the expression of MREL in terms of eligible liabilities is not entirely appropriate for FMIs, as their liabilities are not sought after for funding purposes, but are the consequence of their business model. Euroclear Bank’s liabilities are heavily driven by overnight participant balances. Euroclear Bank invests this cash short-term in reverse repurchase operations, but does not seek such funding actively. The fact that Euroclear Bank does not conduct maturity transformation and that such funding does not serve to fund medium or long-term assets, shields Euroclear Bank from the adverse consequence of a funding withdrawal in a crisis. Euroclear Bank’s balance sheet would automatically shrink, with limited impact on the banks’ activities.
We would therefore propose to exclude liabilities related to the use of payment and settlement systems from the total amount of liabilities to be covered by the MREL.
2. Should the resolution authority be allowed to adjust downwards? What are the specific circumstances under which resolution authorities should allow a smaller need to be able to absorb losses before entry into resolution and in the resolution process than indicated by the capital requirements?
The word “adjusting” should not be modified. Indeed, it may be desirable to revise an individual institution’s loss absorption amount downwards to reflect:a. measures that may ensure loss allocation to other stakeholders (e.g. guarantees, commitments, insurance, contractual liability limitations). Such measures would allow a higher loss amount to be absorbed before entry in resolution. It would be inadequate if the expected MREL for loss absorption purposes would be identical for institutions facing similar initial amounts at risk, but with very different risk absorption measures. This is particularly true for FMIs; and
b. the risk profile of the institution, including its history of losses and recapitalisation events, as well as any other regulatory frameworks it must comply with. Resolution authorities should be able to decrease the loss absorption amount to take into account the fact that CSDs with a banking license should be treated differently based on their special role in the market, different risk profile and distinct regulatory framework.
3. Should any additional benchmarks be used to assess the necessary degree of loss absorbency? If yes, how should these be defined and how should they be used in combination with the capital requirements benchmark? Should such benchmarks also allow for a decrease of the loss absorption amount compared to the institution’s capital requirements?
Institutions’ recovery and resolution plans and their resolvability assessment should not only serve as an input to the determination of the recapitalisation amount, but also of the loss absorption amount. Indeed, the scenarios described in such plans give an indication of the levels of market or idiosyncratic stress that are necessary in order to bring the institution down.They also show which recovery measures would need to fail before entry in resolution. In that sense, they are an indicator of the overall risk appetite of institutions and of resolution authorities. The easier resolution – the more acceptable it may be to let an institution fail. The lower the institutions’ risk appetite in terms of resistance to stress events (taking into account all loss-absorption and risk transfer measures) – the lower any MREL requirements should be.
4. Do you consider that any of these components of the overall capital requirement are not appropriate indicators of the capital required after resolution, and if so why?
Determining a recapitalisation amount gives rise to a number of conceptual and practical issues:• The timing by which such capital should be available leads to very different conclusions as to the amount of capital needed. The paper implicitly assumes that it is immediately after the “resolution weekend” and that the relevant “bail-inable” liabilities should be part of resources that need to be immediately available for stabilisation purposes. This is emphasised by the mention that any changes to the capital needed for complying with authorisation requirements should reflect the post-resolution situation but without “adversely affecting the provision of critical functions by the institution”.
However, the resolution process may lead to a transfer or sale, or even to an orderly wind-down of some activities that are deemed critical for the market, over a period of time. This means that on Monday morning, the institution may well be required to re-open and offer such activities itself, but transfer them or close them down over the course of several months. Does it mean that the full recapitalisation requirement for MREL should be applicable? Or that a lower amount could do, with the perspective that some activities may be sold/transferred/wound down? We believe the latter, as capital should only be needed to support the institution’s activities in a steady state.
This argument is particularly true for ICSDs. Most of ICSDs’ activities are critical. However, winding-down is not unthinkable, provided sufficient time is available to ensure an orderly transfer of participant cash, assets and business to alternative providers.
• Furthermore, the requirement for a recapitalisation amount is particularly inappropriate for ICSDs in view of other regulatory requirements applicable to them. Indeed, CSDs are required to establish an orderly wind-down plan and to maintain procedures ensuring the timely and orderly settlement and transfer of participants’ assets to another CSD in the event of a withdrawal of authorisation (art. 20.5 of CSD regulation), and to hold sufficient amounts of capital to make such a wind-down possible under the CSD regulation (art. 47 of CSD regulation). Forced recapitalisation is at odds with the wind-down requirement.
• Finally, and though we believe this argument to be stronger for FMIs than for other institutions, it remains applicable to all: if the market does not recapitalise an institution (if it is unable to raise capital before resolution), would that not mean that the market does not support a return to viability of this precise infrastructure? Then, why should recapitalisation be forced ex ante upon the market? Would it not create moral hazard and disincentivise support in recovery?
In view of the preceding points, we believe that the recapitalisation amount, if any, should be based on the resolution strategy and on the resolvability assessment. It should be the lowest of:
• The amount necessary to conduct the business in the least capital-intensive way during the resolution process. For example, in the case of Euroclear Bank, capital requirements are mainly driven by intraday credit provision to participants. In resolution, this source of risk would likely be reduced, automatically leading to lower capital requirements.
• The amount necessary in the new steady state, taking into account the shape of the institution after resolution has been completed, including any transfer/sale/wind-down of business that may take place, which may entail the closing down of critical activities over time.
5. Is it appropriate to have a single peer group of G-SIIs, or should this be subdivided by the level of the G-SII capital buffer? Should the peer group approach be extended to Other Systemically Important Institutions (O-SIIs), at the option of resolution authorities? If yes, would the appropriate peer group be the group of O-SIIs established in the same jurisdiction? Should the peer group approach be further extended to other types of institution?
The peer group approach will allow resolution authorities to inform their decision based on a benchmark. However, we believe that the proposed “automatic” approach has a major drawback: whatever authorities decide will influence the median that serves as benchmark. This may lead to an upward drift in MREL requirements for G-SIFIs. This should be addressed.Due to that major drawback, we do not believe that this approach should be extended in a mechanical way (i.e. forcing authorities to match a median) for other types of institutions. We nevertheless acknowledge that comparisons are informative and we encourage authorities to share information in that respect to ensure a level-playing field. This should not prevent authorities from taking into account the specificities of the institutions under consideration. For example, any set of O-SIIs (domestic or cross-border) would be rather different from Euroclear Bank, which, as an FMI, should only be benchmarked against similar types of institutions.
8. Do you agree that resolution authorities should seek to ensure that systemic institutions have sufficient MREL to make it possible to access resolution funds for the full range of financing purposes specified in the BRRD?
As also explained below (Q11), we believe that “sufficient MREL to access resolution funds” should, in the case of FMIs, at least exclude liabilities related to the use of payment and settlement systems.11. Overall, do you consider that the draft RTS strikes the appropriate balance between the need to adapt the MREL to the circumstances of individual institutions and promoting consistency in the setting of adequate levels of MREL across resolution authorities?
The draft RTS leaves a high level of discretion to resolution authorities in setting the MREL and, in that sense, it does allow authorities to determine MREL in a way that would be appropriate for individual institutions.However, by adding up a loss absorption and a recapitalisation amount, and assuming that such recapitalisation amount should be set such as not to disrupt the provision of critical activities, the draft RTS may encourage authorities to set an excessively conservative MREL, in particular for FMIs.
This could force institutions to issue bail-inable liabilities they do not need. For example, even though Euroclear Bank has a capital ratio of some 40%, a strict interpretation of the draft RTS may lead to a doubling of the requirements in terms of eligible liabilities and own funds. Would it be reasonable for Euroclear Bank to issue large amounts of debt that it does not need for the purpose of conducting its business?
Finally, the expression of MREL in terms of eligible liabilities is not entirely appropriate for FMIs, as their liabilities are not sought after for funding purposes, but are the consequence of their business model. Euroclear Bank’s liabilities are heavily driven by overnight participant balances. Euroclear Bank invests this cash short-term in reverse repurchase operations, but does not seek such funding actively. The fact that Euroclear Bank does not conduct maturity transformation and that such funding does not serve to fund medium or long-term assets, shields Euroclear Bank from the adverse consequence of a funding withdrawal in a crisis. Euroclear Bank’s balance sheet would automatically shrink, with limited impact on the banks’ activities.
We would therefore propose to exclude liabilities related to the use of payment and settlement systems from the total amount of liabilities to be covered by the MREL.
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