Bank Recovery and Resolution Directive(BRRD): Level 2 –
MREL AND TLAC
Updated: January 2017
On 27 February, ESBG replied to the EBA consultation on MREL. ESBG expressed apprehension over the potentially overly conservative amounts determined for loss absorption and recapitalisation. More generally, ESBG is concerned that such an approach could lead to an excessive total MREL. ESBG holds that the principle of proportionality should be taken into consideration when determining the recapitalisation amount. Furthermore, there is the question whether the markets would have enough appetite to absorb the (subordinated) bonds that will need to be issued to meet the (very demanding) MREL requirements that are about to be defined for banks.
On 28 November 2014, the European Banking Authority (EBA) launched a public consultation on Technical Standards that further specify the criteria to set the minimum requirement for own funds and eligible liabilities (MREL) laid down in the Bank Recovery and Resolution Directive (BRRD). The BRRD requires institutions to meet a robust MREL to avoid institutions structuring their liabilities in a way that hampers the effectiveness of bail-in or other resolution tools. MREL is not a fixed figure imposed by legislation, but rather needs to be set on a case-by-case basis by resolution authorities. The draft Standards clarify how the institution's capital requirements should be linked to the amount of MREL needed to absorb losses and, where necessary, recapitalise a firm after resolution.
ESBG responded to this consultation on 2 March 2015. The main concern is that the TLAC requirement will end up applying to all banks, and not only to global systemic banks as originally foreseen also within the EU. The rationale is that, due to market discipline, non G-SIFIs banks will be obliged to increase their capital requirements in order to meet market expectations. Furthermore, the TLAC framework should be flexible enough to adapt to the existing resolution framework at national level, taking into account that some jurisdictions have already developed frameworks for the recovery and resolution of credit institutions with similar requirements, as is the case for the MREL in the EU.
On 10 November, the Financial Stability Board (FSB) published a consultation on its proposal to set a common framework for building a buffer of a total loss absorbing capacity (TLAC) for G-SIFIs. The proposals respond to the call by G20 leaders at the 2013 St. Petersburg Summit to develop proposals by the end of 2014. The TLAC will entail a common Pillar 1 minimum TLAC requirement set within the range of 16–20% of risk-weighted assets (RWAs), and at a minimum twice the Basel III leverage requirement. The topic of TLAC is very closely linked to the MREL requirement.