The European Commission has taken an important step today towards ensuring the effectiveness of so-called ‘bail-in’ rules for banks and, more broadly, clarifying the overall EU resolution framework.
Today’s proposed Delegated Regulation specifies the criteria that authorities responsible for resolving banks will need to consider when setting the minimum requirements for own funds and eligible liabilities (MREL) – or easily ‘bail-inable’ instruments – for the purpose of loss absorption and recapitalisation of banks. The Delegated Regulation will further clarify a key provision of the Bank Recovery and Resolution Directive (BRRD) and support the overall objective of having a robust MREL.
Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, said: “It is important that banks hold enough regulatory capital and high-quality liabilities to absorb potential losses in case they have to be resolved. Today’s implementing rules help ensure that. It matters because we need a well-functioning system where it’s the banks’ creditors, rather than tax payers, who pay for problems in banks.”
The BRRD does not foresee a harmonised minimum level of bail-in able instruments at the level of individual banks. The regulatory standard needs to respect this choice of the co-legislator. Instead, it gives resolution authorities detailed guidance for setting out these requirements for individual banks, while also allowing them discretion on the minimum level on MREL and, to a lesser degree, on the composition of MREL that is appropriate for each bank. The bank-specific nature of MREL recognises the diversity of business models and funding strategies among European banks, all of which fall under the broad scope of the BRRD.
The Delegated Regulation adopted today is based on the draft regulatory technical standard of the European Banking Authority (EBA), which the Commission amended to ensure compliance with the BRRD.
The BRRD (IP/14/2862) requires that relevant resolution authorities draft resolution plans for banks, outlining options for applying resolution tools and powers. In accordance with the foreseen resolution approaches, the resolution plans should also include a minimum requirement for own funds and eligible liabilities (MREL) and a deadline by which to achieve it.
The purpose of MREL is to ensure that banks hold sufficient amounts of regulatory capital instruments and high-quality ‘bail-inable’ liabilities that could be readily used to absorb losses and to recapitalise the bank once it emerges from a resolution. This helps to ensure that, once banks get into financial difficulties, the costs of their rescue are shouldered by their owners and creditors rather than tax payers.
As specified in the BRRD, resolution authorities, namely the Single Resolution Board and National Resolution Authorities, consider a list of criteria when determining MREL, such as bank’s size, funding model, risk profile and the need to ensure that the bank is recapitalised appropriately post-resolution. To ensure that MREL requirements are determined in a manner that is consistent across banks, the BRRD mandated the EBA to clarify, via a regulatory technical standard, how these criteria should be applied by resolution authorities.
The draft regulation is now passed on to the Council and the European Parliament for their consideration. They are entitled to an objection period of 3 months.
Moreover, article 45 of the BRRD mandates the Commission to carry out an MREL review by the end of 2016. Importantly, this work will take into consideration the international TLAC standard for global systemically important banks, recently adopted by the G-20. The Commission intends to make a proposal to introduce this standard into EU law in 2016, well in time before its entry into force in 2019.
The Commission statement and related information are available here.