Elke König of SRB Speaks on Proportionality and MREL Implementation

An ECA recommendation that is "...already partially fulfilled is the development of a policy on MREL [minimum requirement for own funds and eligible liabilities]: our 2017 MREL approach is public and has been applied in the 2017 resolution planning cycle." In 2018, there will be a clear focus on determining MREL for all banking groups and significant entities within banking groups. Several other recommendations are actually deliverables planned for 2018-2020 in the multi-annual program. This includes the work on substantive impediments to resolvability, the ongoing revision of the cooperation agreement with national resolution authorities and of the Memorandum of Understanding with ECB, an update to the resolution planning manual and the completion of fully compliant resolution plans for all SRB banks by 2020. She also highlighted the importance of harmonizing insolvency laws of banks. The common SRM framework for resolution is faced with 19 or more different insolvency procedures. The failing or likely to fail, or FOLTF, assessment does not automatically link to the criteria for insolvency/liquidation. National bank insolvency procedures must be raised to a common standard to clarify the line between resolution and insolvency and eliminate wrong incentives, said Ms. König.

She also highlighted that "we undersign" the principle of proportionality and follow it in "our application of the resolution framework." However, "... if you want us to be proportionate, we need to have the necessary discretion. This applies in a number of areas: the quantity and quality of MREL, the deadline to comply with it, even the way to remedy the breaches of MREL." She added that "it is natural to expect us to be proportionate and explain our choices" but "it would be dangerous to constrain the ability to tailor to the specific situation of each bank how much subordinated and/or non-subordinated MREL the bank needs, and by when. It would run contrary to the objective of proportionality and achieving resolvability. As long as the necessary flexibility (for example, to address risks to resolvability) is retained in the calibration of MREL requirement, without caps or constraints, and resolution authorities are "empowered to tailor the remedies to breaches of MREL case-by-case, without automaticity, then we could agree on removing MREL guidance; this would also avoid further complicating the framework."

To streamline the framework for setting MREL, the SRB Chair recommends the move from the current two-tier process to a one-tier approach, to enable SRB to address decisions directly to banks. In the two-tier process, SRB determines MREL targets, but then national resolution authorities need to implement the SRB decision. The two-tier approach does not add any room for discretion for national resolution authorities, while it leads to delays in the implementation of the decisions, different rights and obligations in different member states, and the possibility to challenge the SRB decisions. Moving to a one-tier approach would increase operational efficiency of the SRB and protect it from additional challenges. This, by the way, holds true for any decision on impediments to resolvability too. She concludes that the "recent audit and cases show that we stand on much more solid grounds today, but challenges remain for the resolution framework and its application."

Related Link: Speech

Keywords: Europe, EU, Banking, MREL, Proportionality, Resolution Framework, SRMR 2, SRB