Banks Seek Capital Relief From Unified Euro-Area Jurisdiction

  • Lemierre says current approach drives up systemic risk buffer
  • Brunel calls for internal MREL to be dropped in currency bloc

Banking regulators should treat the euro area as a single jurisdiction to bring down major lenders’ capital surcharges and loss-absorbing debt requirements, according to senior bankers at BNP Paribas SA and Credit Agricole SA.

Jean Lemierre, chairman of BNP Paribas, said regulators currently view lenders’ activities conducted between euro-area countries as cross-border, driving up the capital buffer requirement for systemic risk that Europe’s biggest banks must meet. If regulators treated the currency bloc as a unified jurisdiction, firms would no longer be “penalized” in this way, he wrote in an article prepared for a conference in Malta this week.

This regulatory approach would also reduce the cost and complexity of meeting European Union bank-failure rules, which require loss-absorbing liabilities to be issued by euro-area banks’ subsidiaries within the bloc, according to Jerome Brunel, corporate secretary of Credit Agricole. This minimum requirement for own funds and eligible liabilities, or MREL, is intended to keep taxpayers off the hook when a lender collapses.

Within the euro area, where efforts to integrate financial markets include a single supervisor attached to the European Central Bank and a common resolution authority, it would “only be logical” for this MREL requirement within banking groups to be dropped, Brunel wrote in an article for the same conference.

Risk Management

“As things stand, banking groups headquartered in, and operating across the banking union would face internal MREL for their subsidiaries, despite their centralized risk management, their single supervisory authority, their single point of entry resolution strategy and their single resolution authority,” he wrote. “If the banking union is to become a reality, it should be treated as a single jurisdiction.”

Mark Venus, head of recovery and resolution planning at BNP Paribas, criticized EU plans to penalize banks for missing their MREL targets as it does for capital requirements. That proposal, part of the EU’s overhaul of financial laws presented last year, ignores the fact that, unlike capital, debt securities regularly mature, are repaid and reissued, leaving issuers vulnerable to market disruptions, Venus said.

“This feature of debt cannot be ignored, it is an essential difference in the nature of the underlying liabilities, and entirely justifies differential treatment of MREL and capital breaches,” he wrote. “Distribution restrictions might be appropriate in some instances of MREL breaches, but there should be no question of automaticity.”

Elke Koenig, who chairs the EU’s Single Resolution Board, wrote that the rule revamp floated by the European Commission, the EU ’s executive arm, should require securities used to meet MREL to be subordinated, making it easier to observe the principle that no creditor should be worse off in a resolution than in an insolvency.

Subordination to meet any individual guidance on MREL levels wouldn’t be mandatory under the current proposal, Koenig says. If subordination were limited to global systemic banks, there might be “cliff effects” relative to similar-sized banks that don’t qualify as globally systemic, she said.

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