EBA proposed regulatory technical standards that specify the methodology to be used by resolution authorities to estimate the Pillar 2 and combined buffer requirements at 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 the level of which own fund requirements have been set by the competent authority. The consultation runs until October 24, 2020, with the final standards and the communication to EC being planned for December 2020.
EBA proposes a pragmatic approach aiming to create a framework to improve accuracy in setting the MREL requirement, without requiring sub-consolidation at resolution level and without blurring the lines of responsibilities between competent and resolution authorities in the capital setting process. The proposed approach aims to focus on resolution groups that are significantly different from the prudential group on which capital requirements have been set. To ensure that this methodology only captures resolution groups for which an estimation of Pillar 2 and combined buffer requirements is effectively needed, it was decided to introduce a materiality threshold of 5%. The threshold is meant to express the difference between the total risk exposure measure of the resolution group and the banking group or entity closest in size for which own fund 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 from the main entity for which an additional own fund requirement has been set, then two ways of estimating the resolution group capital requirements have been proposed for setting MREL—a top-down approach and bottom-up approach. With regard to the estimation of the combined buffer requirement, the proposed approach is equally straightforward and proportionate. Under the proposed methodology, the following would apply:
- For the global systemically important institution (G-SII) buffer, the proposal is to keep the G-SII buffer as an input to computing MREL.
- For 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 largest entity constituting the resolution group—whichever is the closest in size. The level of the O-SII buffer and the Systemic Risk buffer can be adjusted up or down by the resolution authority as per Article 45c(7), paragraph 6 of the BRRD.
- No estimation methodology has been proposed for both the capital conservation buffer and the countercyclical buffer. This is because the former is not bank-specific and would be simply set at the consolidated resolution group level and the latter is not included in the MREL calibration.
Comment Due Date: October 24, 2020
Keywords: Europe, EU, Banking, MREL, Pillar2, BRRD, Resolution Framework, Basel, Regulatory Technical Standards, Proportionality, Systemic Risk, Capital Buffers, EBA
Previous ArticleBundesbank Issues Circular on Adjustments to AnaCredit Reporting
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.