SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package. MREL decisions implementing the new framework will be taken based on this policy in the 2020 resolution planning cycle. The decisions will be communicated to banks in early 2021. Each new decision will set out two binding MREL targets, including those for subordination: the binding intermediate target is to be met by January 01, 2022 while the fully calibrated MREL (final target) is to be met by January 01, 2024. SRB also published a feedback statement on the responses received to the consultation on MREL policy.
The regulatory framework for MREL has been recently revised via amendments to the Bank Recovery and Resolution Directive (BRRD2), the Single Resolution Mechanism Regulation (SRMR2), and the Capital Requirements Directive and Regulation (CRD5 and CRR2). The final policy is in line with the EU Banking Package. The following are the key areas covered in the policy:
- Calibration and quality of MREL. The policy document highlights that SRB is modifying and extending the approach to MREL calibration in accordance with the new framework. From 2021, CRR requires institutions to comply with a prudential leverage ratio requirement at all times, acting as a backstop to the risk-based own funds requirements. Thus, the revised BRRD introduces an MREL requirement based on the Leverage Ratio Exposure Measure to complement the risk-based MREL expressed as a percentage of the total risk exposure amount. The Banking Package introduced the total loss-absorbing capacity (TLAC) minimum requirement for global systemically important institutions (G-SIIs) and adapted the current MREL framework accordingly. Additionally, MREL for banking groups with a Multiple Point of Entry (MPE) approach to resolution has been further refined.
- Subordination for resolution entities. The policy document notes that SRB is setting subordination requirements in accordance with the new framework as well as defining a methodology to determine and quantify the "No Creditor Worse Off" risk.
- Internal MREL for non-resolution entities. The MREL policy recognizes that a feasible and credible resolution strategy may involve the placement of loss-absorbing capacity in all parts of the resolution group. The policy has been revised and strengthened in line with the provisions of the Banking Package. Banks are expected to fully implement an internal MREL mechanism aligned with the new framework
- MREL for cooperative groups. The Banking Package introduces new provisions concerning MREL requirements for cooperative networks. In the final policy, SRB has set out minimum conditions to authorize certain types of cooperative networks to use eligible liabilities of associated entities other than the resolution entity to comply with the external MREL. SRB has also set out minimum conditions to waive the internal MREL of the legal entities that are part of the cooperative network. The determination of external and internal MRELs must be fully aligned with the specific resolution strategy in a way that supports the implementation of resolution action.
- Eligibility of liabilities issues under the law of a third country. Effective resolution within the SRM framework, involving liabilities issued under the law of third countries, requires that an EU resolution authority can modify those liabilities. The needed recognition might be achieved by statute or by contract. The final policy expands on how liabilities can be considered eligible through contractual recognition.
- Transition arrangements. The policy document explains the implementation of transitional periods up to the 2024 deadline, including binding intermediate targets in 2022 and informative targets in 2023. Transition arrangements must be bank-specific because they depend on the MREL tailored to that bank and its resolution plan and the bank’s progress to date in raising MREL-eligible liabilities.
In the 2020 resolution planning cycle, MREL targets will be set according to the transition period in SRMR2—that is, setting the first binding intermediate target for compliance by 2022 and the final target by 2024. The decisions will be based on recent MREL data and will reflect changing capital requirements. SRB acknowledges the challenges that banks face in the current and unprecedented situation related to the COVID-19 pandemic and that the focus of banks is on business continuity and supporting the economy. For the existing binding MREL targets (set in the 2018 and 2019 cycles), SRB will take a forward-looking approach for banks that may face difficulties meeting those targets, before new decisions take effect.
Keywords: Europe, EU, Banking, MREL, Banking Package, Leverage Ratio, G-SII, CRR, BRRD, SRMR, Resolution Framework, Basel, TLAC, SRB
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