HM Treasury is consulting on its approach to transpose the revised Bank Recovery and Resolution Directive 2 (BRRD 2) into the UK legislation, given the scheduled withdrawal of UK from EU. The comment period for this consultation ends on August 11, 2020. BRRD 2, which entered into force on June 27, 2019, amends the original 2014 BRRD provisions, to update the resolution policy of EU and the Minimum Requirements for Own Funds and Eligible Liabilities (MREL) framework. In considering the transposition of BRRD 2, the government will look to build on the current resolution regime in UK.
During the Transition Period, and under the terms of the Withdrawal Agreement, the UK government will implement EU legislation that requires transposition before the end of 2020. This includes the transposition of BRRD 2 by December 28, 2020. HM Treasury is consulting on the following provisions of BRRD2:
- The introduction of the concepts of "resolution entities" and "resolution groups," which derive from the same terms used in the Total Loss Absorbing Capacity (TLAC) standard of FSB
- The power for the resolution authority to prohibit certain distributions, where the entity fails to meet its combined buffer requirement, when considered in addition to its MREL requirements
- The power for the resolution authority to suspend any contractual payment or delivery obligations after a firm is deemed failing or likely to fail, but before entry into resolution
- Restrictions on the selling of subordinated eligible liabilities to retail clients
- Amendments to the requirements on the contractual recognition of bail-in, to address circumstances in which it would be legally or otherwise impractical to include a contractual term
- A requirement for entities to include, in financial contracts governed by third country law, a term by which the parties recognize that the financial contract may be subject to the exercise of powers by the resolution authority to suspend or restrict obligations
The government does not intend to transpose the requirements in the Directive with which the firms do not need to be comply until after the end of the Transition Period, in particular Article 1(17) that revises the framework for MREL requirements across EU. MREL is the minimum amount of equity and debt that a firm must maintain to absorb losses and provide for recapitalization, in the event of resolution. The purpose of MREL is to ensure that investors and shareholders, and not the taxpayer, absorb losses when a firm fails. The UK already has in place a MREL framework in line with the international standards. BRRD2 states that the deadline for institutions and entities to comply with end-state MREL requirements shall be January 01, 2024. Given that this is after the end of the Transition Period, it is right that the UK exercises its discretion about whether to transpose those requirements. The scope of the BRRD2 covers credit institutions, certain investment firms, certain financial institutions, financial holding companies, mixed financial holding companies, and mixed-activity holding companies.
Comment Due Date: August 11, 2020
Keywords: Europe, UK, Banking, BRRD2, MREL, TLAC, Bail-In, Transition Period, Withdrawal Agreement, Brexit, Basel, HM Treasury
Previous ArticleFCA Issues Statement on Legislation to Amend Benchmarks Regulation
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
BCBS and FSB published a report on supervisory issues associated with benchmark transition.
IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.
ESMA updated the reporting manual on the European Single Electronic Format (ESEF).
EBA published a statement on resolution planning in light of the COVID-19 pandemic.
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
ECB published a guideline (2020/97), in the Official Journal of European Union, on the definition of materiality threshold for credit obligations past due for less significant institutions.
FED temporarily revised the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes in response to the COVID-19 pandemic.