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September 14, 2017

SRB published articles discussing the takeaways from the crisis management framework in the EU and the way ahead for the minimum requirement for own funds and eligible liabilities (MREL). These articles were written by Elke König, who is Chair of SRB, and were originally published in the Eurofi Magazine.

Takeaways From the First Application of the EU’s Crisis Management Framework. The article on the takeaways from the new crisis management framework emphasizes the need to draw lessons from the recent resolution experiences. The SRB Chair mentioned that the successful resolution of Banco Popular, the precautionary recapitalization of Banca Monte dei Paschi di Siena, and the liquidation of two smaller regional banks in Italy occurred almost exactly five years after the first proposal for the Banking Union in June 2012. The solutions found for these cases varied substantially. The resolution of Banco Popular proved the new system effective, whereas the outcomes for the three Italian banks highlighted the need for further harmonization, in particular concerning the regulation’s objective of breaking the link between public finances and bank losses. Although the decisions differed, the four banks saw themselves confronted with the same legacy issue of nonperforming loans (NPLs). Authorities must find ways to swiftly address this issue. By definition, losses will emerge in the management of NPLs and portfolios cannot be whitewashed. Increased transparency and the development of a frictionless secondary market would mark steps in the correct direction. 

 

MREL—the Way Ahead. The article on MREL highlights that SRB is making good progress in refining its MREL policy and developing MREL targets for the banks under its remit. MREL targets are individually tailored to banks as they differ in their business model, operational structure, and risk profile, among other factors. SRB will monitor the developments on EC’s proposed banking package from November 2016. EC has proposed to implement the total loss-absorbing capacity (TLAC) standard as a Pillar 1 requirement for global systemically important banks (G-SIBs). Since G-SIBs and other systemic institutions compete in the same markets and might have similar systemic footprints, a level playing field needs to be ensured and cliff effects avoided. Thus, SRB favored a Pillar 1 requirement for both. SRB also urges finalization of the reform of the creditor hierarchy and eligibility criteria. SRB also believes that it is important for the final proposal to maintain flexibility for the resolution authority to take timely action to address breaches of MREL, where necessary, and to make sure that only liabilities that can really be bailed-in count toward MREL. Overall, MREL implementation is a multi-year process that is proceeding well despite the regulatory uncertainty. The next years will be crucial for developing binding MREL targets and ensuring that they are met.

 

Related Link: Articles

Keywords: Europe, EU, Banking, Crisis Management Framework, MREL, TLAC, G-SIB, SSM, Eurofi, SRB

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