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
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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