EBA published the final draft regulatory technical standards that specify the methodology to be used by resolution authorities to estimate the Pillar 2 and combined buffer requirements at the resolution group level for setting the minimum requirement for own funds and eligible liabilities requirement (MREL) under the Bank Recovery and Resolution Directive (BRRD). The estimation of Pillar 2 and combined buffer requirements is necessary for setting MREL when the resolution group perimeter differs significantly from the prudential perimeter, at which own fund requirements have been set by the competent authority. The final draft technical standards specify a straightforward and proportionate methodology for estimating own funds and combined buffer requirements.
Article 45c(4) of BRRD had tasked EBA with developing a methodology for authorities to use in estimating the capital requirements to be used as inputs when calibrating MREL. These regulatory standards set out this methodology, which introduces a threshold to capture only resolution groups that differ sufficiently from the prudential group. The methodology aims to be pragmatic by combining top-down and bottom-up approaches to estimating the additional own funds requirement and the combined buffer requirement. To ensure that this methodology captures only resolution groups for which estimates of Pillar 2 and combined buffer requirements are needed, it was decided to introduce a materiality threshold of 5%. The threshold is meant to express the difference between the total risk exposure amount of the resolution group and that of the banking group or entity closest in size for which own funds requirements have been effectively set by the competent authority.
If a resolution group is more than 5% different in terms of total risk exposure amount from either the overall banking group or the main entity for which Pillar 2 requirement has been set, two main ways of estimating the resolution group’s capital requirements for setting MREL are proposed—a top-down approach and bottom-up approach. With regard to the estimation of combined buffer requirements, the proposed approach is equally straightforward and proportionate. The proposed methodology is as follows:
- For the global systemically important institution buffer, the proposal is to use the global systemically important institution buffer when the group’s top entity is also the resolution entity for the resolution group. Still, pursuant to Article 45c(3) of the BRRD, the resolution authority may, when calibrating requirements, adjust the combined buffer requirement on the basis of the resolution plan and thus not apply the global systemically important institution buffer.
- For the other systemically important institution (O-SII) buffer and Systemic Risk buffer, the proposal is to use as an input to calibrate MREL, the buffer of either the banking group or the largest entity constituting the resolution group, whichever is the closest in size to the resolution group. Again, the level of the O-SII buffer and systemic risk buffer can be adjusted up or down by the resolution authority pursuant to Article 45c(7) of the BRRD.
No estimation methodology is proposed for the capital conservation buffer or the countercyclical buffer. This is because the former is not bank-specific and is simply set at the consolidated resolution group level and the latter applies to specific exposures. The draft technical standards will be submitted to EC for endorsement before being published in the Official Journal of the European Union. The technical standards will apply from the twentieth day following that of their publication in the Official Journal of the European Union.
Keywords: Europe, EU, Banking, MREL, Pillar 2, BRRD, Resolution Framework, Basel, Regulatory Technical Standards, Proportionality, Systemic Risk, Capital Buffers, EBA
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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