EBA published the first quantitative report taking stock of the increased capacity of minimum requirements for own funds and eligible liabilities (MREL) in EU. The report shows that authorities have made strong progress in agreeing to resolution strategies and setting the related MREL requirements. However, the report also notes that banks need to issue MREL-eligible debt to meet the shortfalls in MREL. The focus of this report is on external as opposed to internal MREL—that is, MREL expected to be issued to investors in the market and not to a parent company. Additionally, EBA published a factsheet on its work on MREL and resolution planning. EBA will soon publish a report on the quality of MREL instruments also.
EBA received a total of 266 decisions relating to banks where resolution, by either a bail-in or a transfer, would be favored rather than liquidation. Out of those decisions, 22 have been left out of the shortfall analysis for lack of actual MREL decisions and 22 were left out because of data quality issues. Of the remaining ones, approximately 80% of EU domestic assets are now covered by a bail-in strategy and 5% by a transfer strategy. Fifteen percent of assets are now either earmarked for liquidation or still awaiting a resolution strategy. Also, for most banks the distribution of this MREL within the group is yet to be determined. On a weighted average basis, MREL requirements in the EU range between 26.5% of risk-weighted assets for global systemically important institutions (G-SIIs) and 19% of risk-weighted assets for the banks with total assets below EUR 1 billion that are neither G-SIIs nor other systemically important institutions (O-SIIs).
Out of the 222 resolution groups that have been considered in the shortfall analysis, 105 banks already meet their requirement while the remaining 117 reported an estimated MREL shortfall of EUR 178 billion. The shortfalls in MREL vary, depending on the type and size of the bank and its resolution group. Other marketable securities tends to benefit larger banks and to dry out as institutions decrease in size. Total shortfall for 7 out of 16 G-SIIs resolution groups reaches EUR 51 billion, to be considered in the light of EUR 29 billion in other marketable securities. Funding needs for 49 out of 79 O-SIIs reach EUR 101 billion, to be considered in the light of EUR 33 billion of other marketable securities for 39 O-SIIs. Finally, funding needs for 61 out of 127 smaller banks reach EUR 23 billion in the light of a limited EUR 4.4 billion of other marketable securities for 21 resolution groups. While this is significant, it is worth noting that 65 of the banks with shortfalls also report instruments totaling EUR 67 billion that are close in nature to MREL but not eligible. This shows that some banks already have a sophisticated investor base, likely to invest in long-term unsecured debt such as MREL-eligible instruments.
In the light of these shortfalls, EBA encourages European resolution groups to take advantage of the current positive market conditions to issue and build-up resources. As pointed out in the recent EBA risk assessment report, despite continued volatility, spreads for all market instruments have been on a downward trend for most of 2019, with spreads between secured and unsecured as well as between senior and subordinated instruments narrowing.
This report is based on data provided by resolution authorities and covers the actual population of banks covered by an MREL decision, the actual level of this requirement, and the level of resources effectively eligible in the relevant jurisdictions. It is the first report by EBA under a revised methodology and will be updated annually as required by the recently agreed banking package. This means that the report considers formally adopted MREL decisions that were reported to EBA and MREL decisions that were communicated to institutions by way of indicative quotas by the middle of 2019, but have not been formally adopted (both by the end of June 2019). Going forward, EBA plans to also consider the impact of MREL on bank profitability in more detail in the impact assessment that it is expected to deliver to EC by December 2022.
Keywords: Europe, EU, Banking, Resolution Planning, MREL, MREL Eligible Debt, G-SII, O-SII, Risk-Weighted Assets, BRRD, EBA
Previous ArticleEU-US Insurance Forum in March to Focus on Cyber Risk and Insurtech
The Australian Prudential Regulation Authority (APRA) released an update on the timelines for revisions to the market risk prudential standards and the implications for the broader capital framework.
Three global standard-setters launched a joint consultation that reviews the margining practices during the COVID-19 pandemic and identifies potential areas for further policy work.
The Bank of England (BoE) published the Statistical Notice 2021/09 requiring additional information from firms and software vendors to assist in the onboarding and testing phases for migrating statistical reporting to the BEEDS portal.
The European Banking Authority (EBA) published the final draft regulatory technical standards on gross jump-to-default amounts and on residual risk add-on under the Capital Requirements Regulation or CRR.
The Financial Conduct Authority (FCA) published the final rules on the Investment Firms Prudential Regime (IFPR) to streamline and simplify the prudential requirements for solo-regulated UK firms authorized under the Markets in Financial Instruments Directive (MiFID).
The European Supervisory Authorities (ESAs) have delivered to the European Commission (EC) the final report on the draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR).
The European Banking Authority (EBA) published an advice to the European Commission (EC) on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework.
The Financial Stability Oversight Council (FSOC) released a report in response to the U.S. President's Executive Order on climate-related financial risk.
The Bank for International Settlements (BIS) published a paper that examines the business models and the associated risks posed by big technology firms foraying into financial services sector.
The Bank for International Settlements (BIS) announced the development of an Asian Green Bond Fund, in collaboration with the development financing community, to channel global central bank reserves to green projects in Asia Pacific.