Member States’ push-back threatens to undermine already fragile bank bail-in standards

Brussels, 7 March 2016 ‐ Efforts by Member States to weaken the already fragile bank bail-in regime are raising the spectre of a return to taxpayer-funded bail-outs, said Finance Watch.

The public interest advocacy group today called on the European Commission to strengthen and harmonise new ‘bail‐in’ standards for systemically important banks in order to reduce as far as possible the risk to taxpayers posed by banks that remain too big or too important to be allowed to fail.

Finance Watch has also published a new Policy Brief on bank bail‐in standards. The document, “TLAC/MREL: Making failure possible?”, highlights the fragilities in the bail-in regime, as well as detailing recent technical developments in the EU and US application of the standards: Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and Total Loss Absorbing Capacity (TLAC).

1. Finance Watch calls upon the Commission to reconsider its stance on the “burden sharing” test in MREL

The Commission should reconsider an amendment that weakens the “burden sharing” principle, one of the key elements of the European bail-in regime. The draft Regulatory Technical Standards on MREL submitted by the European Banking Authority (EBA) [1] contained a test to assess whether MREL for a systemically important bank would be sufficient for it to access external funds, such as the Single Resolution Fund, in resolution.

This “burden sharing” threshold was initially set at a minimum 8% of total liabilities including own funds but was removed from the RTS in a set of amendments proposed by the Commission. By removing this test, the Commission opens the door to Member States to apply the rules differently, potentially weakening their application in some cases.

EBA took the unprecedented step of issuing a Dissenting Opinion [2] on the Commission’s amendments, citing the objective of “minimising reliance on extraordinary public financial support”. The Commission’s action may have been prompted by pressure from Member States including France, Italy and Portugal to weaken the new bail-in rules.

Finance Watch senior policy analyst, Christian M. Stiefmüller said:

“Primary legislation clearly intended that bank investors should bear a minimum amount of losses before calling on outside assistance. The introduction of an ex-ante test would be a signal that the “burden sharing” principle is more than an empty statement of intent. It would also increase confidence that a systemically important bank could actually make use of the safety nets provided when needed. Dispensing with such a test makes it more difficult for the resolution authority to impose uniform standards and puts them under even more pressure when a crisis hits.

“We believe that a prudential tool, such as the test proposed by the EBA, is needed to bring the “burden sharing” principle to life and we call upon the Commission to endorse a reinstatement of this test.”

2. Finance Watch supports the Commission’s concept of implementing TLAC via the CRDIV/CRR framework

In a more positive development, the Commission has reportedly [3] proposed harmonising the rules on TLAC, which apply to global systemically important banks, with the rules on MREL and the Basel III framework, which apply to all European banks. It also floated the concept of requiring banks to meet TLAC, and potentially MREL, exclusively with higher-quality capital instruments (Tier 2 or higher).

Christian M. Stiefmüller, said:

“These ideas go in the right direction. The Commission’s suggestion of integrating TLAC and MREL within the CRD IV/CRR framework and focussing on higher quality capital would sidestep the complexity of bailing in potentially contentious liabilities, such as unsecured senior debt, and could go a long way towards a better capitalised, more stable banking system.

“Domestic systemically important banks belong in this framework as well, because they are just as prone to triggering a systemic event as global banks. We support the Commission’s approach set out in this document.”

3. Bail-in is a fragile tool and should be strengthened with other measures

Bail-in is already proving to be a fragile tool and does not solve the problems of thin capitalisation and contagion risk that have bedevilled the banking industry for the last decade.

Finance Watch’s new Policy Brief, “TLAC/MREL: Making failure possible?”, offers a critical overview of the EU’s bank resolution regime, concluding that the bail-in tool cannot be considered as a valid replacement for long-overdue structural reforms in the banking sector.

Finance Watch Secretary General, Christophe Nijdam, said:

“The principle that banks should bear their own losses is absolutely right, but we should not stake our hopes on this principle working when the banks in question are still too big or too important to fail. With the IMF reporting [4] that financial crises are six times more costly than earthquakes, it is clear that prevention is better than cure. Instead of creating a tangle of complicated, and probably impractical, bail‐in rules we should concentrate our efforts on simple and sound capitalisation rules and meaningful structural reform to keep EU taxpayers safe in the future.”

Download “TLAC/MREL: Making failure possible?”


For more detailed information about bail-in or to speak to Christian M. Stiefmüller please contact:

Charlotte Geiger at, telephone +32 2 880 0441

Greg Ford at, telephone +44 (0) 7703 219 222

[1] EBA draft RTS, 3 July 2015, EBA/RTS/2015/05, Article 5

[2] EBA’s Dissenting Opinion on the Commission’s amendments to its draft RTS, 9 February 2016, EBA/Op/2016/02

[3] “EC shocks market with TLAC harmonisation push”, Reuters, 27 January 2016

[4] IMF research on the materialization of contingent liabilities found that the average fiscal cost of government liabilities arising from natural disasters (including earthquakes) is 1.6% of GDP, versus 9.7% for liabilities (including bailouts) arising from the financial sector, IMF blog, ‘Fiscal Costs of Hidden Deficits: Beware—When It Rains, It Pours’ (February 2016)


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