Following a public consultation in the summer of 2016, the EBA submitted a final report on the implementation of MREL to the European Commission (‘Commission’) in December 2016. In its report, the EBA recommended certain changes to MREL in order to improve its technical soundness and implement the TLAC standard as an integral component of the MREL framework.
Shortly before the release of the EBA’s final report, the Commission issued a package of legislative proposals in November 2016 which, among other things, sought to merge the TLAC standard into MREL where it is applied to G-SIBs. Among other things the Commission’s proposals sought to amend the BRRD, the EU Capital Requirements Regulation (‘CRR’), the Capital Requirements Directive IV (‘CRD IV’) and the EU Regulation establishing the Single Supervisory Mechanism (the proposals are therefore referred to as ‘BRRD II’, ‘CRR II’, and ‘CRD V’). The proposals are generally in line with the EBA’s views, including provisions that common equity tier 1 capital (‘CET 1’) used to meet MREL should not be double counted towards meeting capital buffers (i.e. the prevention of double stacking), and that resolution authorities be given the power to waive the application of Article 55 BRRD (contractual recognition of bail-in) for certain instruments where it would be impractical for such a requirement to apply. These proposals are still being negotiated by the EU institutions in trialogue (see below).
The main provisions implementing TLAC into EU legislation, in particular the new ‘Pillar 1 MREL’ requirement for G-SIIs are being introduced by CRR II and CRD V. This new requirement is based on both risk-based and non-risk-based denominators and applies only in the case of G-SIIs. The CRR is amended to require stand-alone G-SIIs that are resolution entities to comply with the MREL requirement on a solo basis, whilst another set of amendments to the CRR require resolution entities that are part of groups designated as G-SIIs to comply with the requirement for own funds and eligible liabilities on a consolidated basis. A new chapter on eligible liabilities is also introduced into the CRR which includes the list of excluded liabilities and eligibility criteria as well as deduction rules for TLAC holdings of other G-SIIs. A new article in the CRD IV restricts the concept of ‘Pillar 2 capital’ to covering micro-prudential risks; in particular Member State supervisors cannot impose additional own funds to cover macro-prudential or systemic risk. Another new article is introduced dealing with the concept of ‘capital guidance’ beyond minimum capital requirements and capital buffers.
The proposed amendments to the BRRD seek to align the current MREL requirements with the TLAC standard and make certain other technical amendments. Among other things the amendments introduce the concepts of ‘resolution entities’ and ‘resolution groups’ which derive from the same terms as used in the TLAC standard. These allow for two principal resolution strategies to be used, Single Point of Entry and Multiple Point of Entry, which are given effect by resolution entities (other than the group parent) issuing either internal or external MREL (respectively). The table below1 sets out the major changes to the MREL framework per the Commission’s legislative proposals, which are closely aligned with TLAC.
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MREL for non G-SIIs
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MREL for G-SIIs
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Scope of covered firms
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All non G-SIIs in the EU
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All G-SIIs in the EU
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Calculation (Denominator)
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Total risk exposure amount; Leverage ratio exposure
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Total risk exposure amount; Leverage ratio exposure
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Subordination: Eligible instruments
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Resolution authority may require on a case-by-case basis. A new non-preferred senior debt class, eligible for MREL is created
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Required but exceptions apply. A new non-preferred senior debt class, eligible for MREL is created
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Internal requirement
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Internal MREL requirement for all banks that are subsidiaries of resolution entities
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All material subsidiaries of non EU G-SIIs must comply with an internal MREL requirement equal to 90% of the G-SII’s Pillar 1 MREL requirement
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Calibration: Pillar 1 vs Pillar 2 approach
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Individual institution specific requirement (Pillar 2 type) based on each bank’s characteristics: resolvability assessment, complexity, risk profile etc
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Common minimum requirement (Pillar 1 type) + individual institution specific requirement (Pillar 2 type)
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Sizing
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Loss Absorption Amount (max: Pillar 1 capital requirements + Pillar 2 buffer)
Combined buffer requirement / Recapitalisation Amount (max: Pillar 1 capital requirements + Pillar 2 buffer)
Loss absorption buffer
Market confidence buffer
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Fixed minimum requirement: 16% risk weighted assets & 6% leverage ratio exposure (TLAC equivalent; as of 2022: 18%, 6.75%)
Combined buffer requirement (Pillar 2 buffer)
Loss absorption buffer
Market confidence buffer
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Deductions
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No deduction requirement
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Deduction required for own eligible liabilities instruments and holdings of eligible liabilities of other G-SIIs
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Come into force
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1 January 2019
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1 January 2019
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At the time of writing this updater we have not yet seen any compromise drafts of the EU legislation from the Presidency of the Council of the EU2. The Commission’s preferred deadline for the European Parliament and the Council of the EU to reach political agreement on the legislation is mid-2018, thereby giving at least six months before the amendments become effective on 1 January 2019.
In terms of recent developments, the European Central Bank (‘ECB’) issued an opinion on the proposed revisions to the EU crisis management framework on 8 November 2017. This included comments on the implementation of TLAC in the EU and amendments to MREL. There is insufficient space in this updater to cover every proposal made by the ECB but it is worth noting that the ECB proposed a minimum transition period for MREL implementation with Member State resolution authorities being given the flexibility to determine a longer transitional period on a case-by-case basis.