EU Bank Resolution Agencies Get More Discretion From EBA

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European Union resolution authorities are getting more flexibility to determine the amount of loss-absorbing liabilities banks must have under rules intended to prevent taxpayer bailouts.

The European Banking Authority’s final rules for setting lenders’ minimum requirement for own funds and eligible liabilities, or MREL, allows resolution authorities to deviate from a standard level based on an assessment of a bank’s business and funding models and risk profile, among other factors.

The standards allow authorities greater discretion than was foreseen in the EBA’s MREL proposal last November.

“The standards have been adjusted following consultation feedback to ensure they provide a clear framework for linking the MREL to capital requirements, including where some parts of capital buffer or Pillar 2 requirements are not relevant to the aims of MREL, and to clarify the treatment of contributions from deposit guarantee schemes to the cost of resolution,” the EBA said in a statement on its website.

EU banking law required the EBA to set out technical standards for the amount and composition of loss-absorbing securities banks must hold, both to ward off a collapse and to finance a resolution if the worst happens. The EU’s bank-failure regulation, the Bank Recovery and Resolution Directive, set a July 3 deadline for the EBA to submit the report to the European Commission, the EU’s executive arm.

Resolution Authority

The MREL technical standards are part of the EU’s efforts to make it possible to resolve banks in crisis without resorting to taxpayer aid. It complements global efforts that will prescribe minimum levels of loss-absorbing capacity for the world’s biggest banks, as well as the EU’s capital rules.

The amount of MREL will be set for each bank individually by the relevant resolution authority, which for the euro area’s biggest banks will be the Brussels-based Single Resolution Mechanism.

“To cater for the diversity of institutions and business models across the EU, the MREL is not a fixed figure,” the EBA said. “Instead, it must be set by resolution authorities on a case-by-case basis for each institution to ensure it is sufficient to implement their resolution plans.”

MREL consists of two elements. The first is meant to absorb losses the failing bank has run up along the way. The second must be available after the first is used up to recapitalize the parts of the bank needed to ensure that functions critical to the working of the financial system can continue. Equity, junior debt and senior debt that’s not protected from bail-in can all count towards MREL.

Capital Buffers

The EBA gives regulators the option of excluding capital buffers when calculating the MREL amount. Equally, bank-specific capital requirements set by supervisors can be ignored if they aren’t needed to absorb losses.

Bigger banks, including those labeled systemically important on a global or regional level, and which may need to tap public funds, have to meet the BRRD’s requirement to wipe out as much as 8 percent of total liabilities, including own funds, before they can resort to such aid.

The world’s biggest banks will have to meet a requirement for total loss-absorbing capacity the Financial Stability Board is drafting. The FSB proposed last year they must have 16 percent to 20 percent of their risk-weighted assets as TLAC. The EU’s financial service chief, Jonathan Hill, has said he would seek to avoid clashes between EU and FSB rules that would burden banks “unnecessarily.”

The FSB, which brings together regulators and central bankers from the Group of 20 nations, plans to deliver the final TLAC rules for endorsement by G-20 leaders in November.

“MREL shares the same goal as the FSB’s TLAC proposals and also many of the most important design features,” the EBA said. “The EBA final draft standards on MREL aim to avoid creating obstacles for those EU resolution authorities with responsibility for global systemically important institutions and seek to apply MREL in a way which is compatible with the FSB’s TLAC proposal.”