SRB communicated its post-Brexit approach to determining the eligibility of UK law instruments without bail-in clauses as minimum requirement for own funds and liabilities (MREL). As per the published communication, SRB will consider liabilities governed by UK law without a contractual bail-in recognition clause as eligible for MREL, if they were issued on or before November 15, 2018. This exemption shall apply until June 28, 2025.
To further elaborate, SRB will consider liabilities governed by UK law without a contractual bail-in recognition clause as eligible for MREL, if they:
- otherwise satisfy the applicable MREL criteria.
- were issued on or before November 15, 2018, when SRB published its resolvability expectations for banks in the context of Brexit and noted the potential consequences of Brexit for banks’ existing stock of UK law governed MREL instruments. This exemption shall apply until June 28, 2025, to ensure alignment with the prudential grandfathering of the requirement to introduce contractual recognition clauses in own funds instruments provided for in Article 494b of the Capital Requirements Regulation
This approach would ensure a smooth transition and would avoid any disproportionate effects on the banks, while still serving the overarching goal of achieving the resolvability of banks and ensuring that they maintain adequate levels of loss-absorbing liabilities. Any liability governed by the UK law that is issued or materially amended after November 15, 2018 must include a contractual bail-in recognition clause to be eligible for MREL. The volume of the concerned instruments will gradually decrease over time as they reach their respective maturity dates. SRB will continue to monitor the resolvability of banks whose liabilities include such instruments and may review the considerations expressed in this communication if changing circumstances affect the resolvability of those banks.
MREL is the minimum amount of equity and eligible debt a bank must maintain to support an effective resolution. These liabilities need to be susceptible to bail-in in the event of a bank resolution action, to minimize the impact on public funds. Liabilities governed by third-country law must include a contractual bail-in recognition clause. Following the introduction of the Banking Package, third-country liabilities not including such clause are automatically not eligible for MREL. This mandatory condition applies to all liabilities, including additional tier 1 and tier 2 instruments. The EU law ensuring automatic application of SRB resolution actions in all EU member states ceased to apply to the UK on December 31, 2020, following the end of the transition period under the Brexit Withdrawal Agreement. Consequently, liabilities governed by UK law are now subject to the same rules as those governed by other third-country laws.
Keywords: Europe, EU, UK, Banking, MREL, Bail in, CRR, Brexit, Resolution Planning, Basel, Regulatory Capital, Resolution Framework, SRB
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