EBA Proposes Standards on Indirect Subscription of MREL Instruments
EBA proposed regulatory technical standards on indirect subscription of minimum requirement for own funds and eligible liabilities (MREL) instruments within groups. The standards specify the methods to avoid that instruments indirectly subscribed by the resolution entity for meeting the internal MREL hamper the smooth implementation of the resolution strategy of the resolution group. The patterns of indirect subscription are also known as “daisy chains of internal MREL.” The proposed technical standards provide a general deduction framework for indirect subscriptions of eligible instruments, present the sequence of deduction, and cover cases where the general deduction framework is not practicable. The consultation runs until October 27, 2020. The finalization of the draft technical standards and communication to EC is planned by December 2020.
Under the draft technical standards, a general deduction framework applies in the general case and a “fall-back” solution applies where the deduction approach cannot apply. The deduction occurs at the level of any intermediate entity that has an MREL requirement in a chain of ownership inside a group. The amount of deduction of MREL-eligible instruments equals the full amount of the intermediate entity’s holdings of MREL-eligible instruments of the lower subsidiaries, with a risk-weight of 0% being applied to these holdings. This deduction framework complements the one already in place for own funds by including eligible liabilities. Where the general deduction framework is not practicable, the resolution authority assesses whether indirectly issued instruments hamper the smooth implementation of the resolution strategy and may apply the measures of Article 45k of the revised Banking Recovery and Resolution Directive or BRRD2 (2019/878) on the breach of MREL, including the removal of a substantive impediment to resolvability.
BRRD2 requires an entity that is not a resolution entity to issue own funds to any entity in the resolution group and eligible liabilities directly or indirectly to the resolution entity. The mandate under Article 45f(6) of this Directive calls for methods that avoid that indirectly issued instruments hamper the smooth implementation of the resolution strategy. To comply with this mandate, EBA proposed these draft regulatory technical standards. Internal MREL is the loss‐absorbing and recapitalization capacity that resolution entities have committed to subsidiaries. In general, this requirement recognizes that feasible and credible resolution strategy may involve the placement of loss‐absorbing capacity and recapitalization in all parts of the resolution group. Internal MREL should be set at a level that is sufficient to support the resolution strategy for the resolution group. Under point (a)(i) of Article 45f(2) of the BRRD2, internal MREL may be issued directly from a subsidiary to the resolution entity or indirectly through multiple legal entities within the group. The latter can include cases where the subsidiary issues internal MREL through another entity within the resolution group to the resolution entity, which itself is subject to internal iMREL (daisy chain)
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Comment Due Date: October 27, 2020
Keywords: Europe, EU, Banking, MREL, BRRD2, Internal Model, Resolution Framework, Basel, TLAC, Resolvability, Regulatory Technical Standards, EC, EBA
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