The Commission proposes to incorporate the total loss absorbing capacity standard (TLAC) into the minimum requirement for own funds and eligible liabilities standard (MREL). It also proposes to make certain targeted adjustments to banks that are not G-SIIs.
The Commission proposes to introduce a minimum harmonised MREL requirement applicable to G-SIIs only. Currently, 13 banking groups in the EU have been identified as G-SIIs. However, the requirement to comply with TLAC will not be extended to non G-SIIs on the basis that in the EU banks already have to comply with the bank-specific MREL provisions stemming from the BRRD.
It is also proposed that in line with the FSB TLAC standard, resolution authorities should be able, on the basis of bank specific assessments, to require that G-SIIs comply with a supplementary MREL requirement (a Pillar 2 add-on requirement). Such a Pillar 2 MREL requirement would be strictly linked to the resolvability analysis of a given G-SII and, in particular, its loss absorption and recapitalisation needs and, be justified, necessary and proportionate. Banks will also be allowed to use certain additional types of highly loss absorbent liabilities to comply with their Pillar 2 MREL requirement as long as bail in of such liabilities in resolution would not result in a treatment of creditors that is worse in comparison to their treatment under insolvency.
In line with the approach underlying the TLAC standard, the Commission’s proposal deals with entities belonging to a banking group in two different ways, depending on the resolution strategy:
- an external MREL requirement is applicable to resolution entities (the entity to which according to the resolution strategy, resolution tools, including bail in instruments held by external creditors, will be applied); and
- an internal MREL requirement is applicable to subsidiaries which are not resolution entities and allows to ‘upstream’ their losses to resolution entities without the need to place such subsidiaries in resolution.