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Germany, U.K. Reject Softening EU Major Bank Failure Rules

  • Nations propose fast TLAC introduction true to global standard
  • Reject TLAC caps and weakening of resolution authorities

Germany and the U.K. rejected efforts to soften the European Union’s implementation of global bank-failure rules intended to prevent taxpayer-funded bailouts.

The EU must quickly and fully enact total loss-absorbing capacity, or TLAC, standards adopted last year by the Financial Stability Board for the world’s biggest lenders to preserve the bloc’s credibility in the Group of 20 nations, according to a joint German-U.K. discussion paper obtained by Bloomberg. The two countries are home to five of the world’s most systemically important banks, including HSBC Group Plc and Deutsche Bank AG.

“Transposition of the TLAC standard is the litmus test whether we really want to implement credibly the shift to bail-in,” the undated paper states, referring to the practice of imposing losses on creditors when a bank collapses. “It is a global compromise to be respected.”

The FSB’s rules on TLAC require global banking giants to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities equivalent to 18 percent of risk-weighted assets and 6.75 percent of leverage exposure by 2022. The EU is currently debating how to incorporate TLAC, which will be phased in from 2019, into its own bank-failure rules.

‘Exceptional’ Cases

Germany and the U.K. said the EU should make TLAC mandatory only for the biggest banks -- those on the FSB’s list of the 30 most systemically important firms. This runs counter to a recent proposal by the European Commission, the bloc’s executive arm, to apply the standard, probably in a less stringent form, to a broader range of firms.

The two countries also rejected a French-Italian proposal to make the minimum TLAC threshold the default requirement that can only be raised in “exceptional” cases, and to cap banks’ loss-absorption requirements.

In a joint paper of their own, France and Italy said banks should never be required to have loss-absorbing capacity of more than 8 percent of total liabilities including own funds -- the level of bail-in required in resolution for a bank to gain access to rescue funds built up from levies on the industry.

“A cap would impose a limit on the ability to credibly require losses to be absorbed by a bank’s own creditors and would transfer that risk to resolution funds,” the German-U.K. paper states.

‘Systematic Change’

The German Finance Ministry declined to comment on the paper. Separately, a spokesman for the ministry reiterated that it’s crucial to implement “the systematic change from bail-out to bail-in” and urged full implementation of the global standard in Europe.

The U.K. Treasury also declined to comment.

As the EU debates how to implement the global TLAC standard, it’s also starting to impose its own minimum requirement for eligible liabilities and own funds, or MREL, this year. Resolution authorities will set an MREL requirement for all banks, not only the biggest ones. Levels for the euro area’s largest lenders will be handed down by the Single Resolution Board in Brussels.

EU rules don’t set an explicit minimum for MREL, but they imply a minimum due to the rules for tapping bailout funds, according to Elke Koenig, head of the SRB. She has consistently spoken of a loss-absorbing baseline for top banks of 8 percent of total assets, and says it’s her job to make sure that banks that may need rescue funds have sufficient loss-absorbing liabilities available up front.

Strict Conditions

Other key elements in which the German-U.K. proposal deviate from plans the European Commission has floated internally on the power of resolution authorities. 

The TLAC standard is defined as a minimum requirement that can be tightened for each bank by resolution authorities. The commission proposed strict conditions on such increases, a move Germany and the U.K. reject.

“Further requirements for the resolution authorities’ setting the firm-specific TLAC only seem possible if they do not curtail de jure or de facto the ability of resolution authorities to act in accordance with this internationally agreed guiding principle,” according to the German-U.K. paper.

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