On July 19, the European Banking Authority (EBA) published its interim report on the implementation and design of the minimum requirement for own funds and eligible liabilities (MREL), which contains a number of provisional recommendations to the European Commission regarding a future legislative proposal on the implementation of the Financial Stability Board’s “total loss-absorbing capacity” (TLAC) standard in the EU and the review of MREL. Finance Watch is pleased to have the opportunity to share its comments and observations on the report and its recommendations.
- Finance Watch recognises that there is a desire on the part of legislators to harmonise the reference base for the minimum requirement for own funds and eligible liabilities (MREL) with that for total loss-absorbing capacity (TLAC). The most consistent, and hence our preferred approach would be to replace “total liabilities and own funds” with the leverage ratio exposure measure. This would enable the legislator to achieve the desired harmonisation without fundamentally altering the BRRD’s conceptual approach of using a non-risk sensitive reference base.
- Double counting of CET 1 capital for buffers and MREL should be excluded for all banks, both for prudential reasons and to maintain a level playing field between market participants. Buffers are designed to act as safeguards to ensure that banks are, at all times, in a position to comfortably cover their minimum capital requirements and should therefore be additive to the other capital requirements, i.e. stacked atop regulatory capital and MREL. Calls to relax automatic restrictions on Maximum Distributable Amounts (MDA) in the event of a breach should be treated with caution.
- Finance Watch believes that systemic importance should be regarded as the primary determinant when calibrating banks’ MREL requirements. In line with the Financial Stability Board’s TLAC Term Sheet we would strongly suggest to broaden the scope of any binding (Pillar 1) MREL requirement to cover all designated systemically important institutions, including both G-SIBs and Domestic Systemically Important Banks (D SIBs/O-SIIs).
- Any harmonisation of the TLAC and MREL frameworks should not be allowed to dilute the 8% “burden sharing” threshold set out in the BRRD, i.e. the need for banks to “bail in” an amount of no less than 8% of total liabilities and own funds before being allowed to access third-party funds in resolution. If the leverage exposure measure is adopted as the reference base, MREL for any banks of systemic significance, including G-SIBs and D-SIBs/O-SIIs, should not be lower than 8% of the leverage exposure measure.
- In the absence of a harmonisation of insolvency law (creditor hierarchies) it is indispensable to ensure that bail-in liabilities are clearly separated from other senior liabilities. All MREL-eligible liabilities should be therefore subordinated, in line with the TLAC Term Sheet. In order to maintain a level playing field this requirements should apply to all banks, not only G-SIBs.
- We recognise the need for banks to have access to a deep and liquid market for MREL-eligible securities. MREL-eligible securities should be well-understood, transparent and marketable instruments which are subordinated by definition, highly standardised and traded on the European and international markets. This could be achieve by restricting MREL-eligibility to Tier 1 or Tier 2 capital instruments as defined under CRR/CRD IV.
- Eligible instruments should be held preferably by large institutional investors capable of absorbing potential losses in the event of a “bail in”. A concentration of holdings in the hands of a few investors, which could trigger systemic contagion, should be prevented. Private investors need to be informed extensively, proactively and in understandable terms about the riskiness of their investment.
- We note that the TLAC Term Sheet requires G-SIBs to introduce structural subordination by means of creating a “clean holding company”. This model should be encouraged, not only for G-SIIs but for all systemically significant banks in the EU so that capital and bail-in liabilities can be downstreamed in the event of a crisis with a minimum of impediments. Structural subordination would also provide an incentive for diversified financial groups to adopt separation of banking and trading activities and, in turn, materially improve their robustness in the case of crisis and the effectiveness of supervision.
- Finance Watch shares the EBA’s concern that resolution authorities may not have the necessary powers at present to press for swift remedial action in the event of a breach and therefore supports the concept of enhancing resolution authorities’ powers of early intervention.
For further questions, please contact Christian M. Stiefmueller, senior policy analyst at Finance Watch.
