EBA on Estimation of Pillar2 and Combined Buffer Requirements for MREL

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.

Related Links

• Press Release
• Regulatory Standards (PDF)

Keywords: Europe, EU, Banking, MREL, Pillar 2, BRRD, Resolution Framework, Basel, Regulatory Technical Standards, Proportionality, Systemic Risk, Capital Buffers, EBA