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    EBA Report Examines Quality of TLAC and MREL Instruments in EU

    October 29, 2020

    EBA published the first monitoring report that examines the issuance and quality of the minimum requirement for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) instruments in EU. The report is intended to inform stakeholders about the implementation review performed by EBA on TLAC and MREL instruments so far and presents views and recommendations of EBA on specific features commonly seen in these instruments. The findings of EBA contain policy views on existing or new provisions, along with the identified best practices. The report also provides an insight into areas for monitoring or potential EBA guidance going forward.

    The report covers five main areas of assessment relevant to determine the quality of the TLAC and MREL instruments—availability, subordination, capacity for loss absorption, maturity, and other aspects including governing law, tax and regulatory calls, and tax gross-up clauses. The report contains 15 recommendations in total, four in the area of subordination, seven in the area of capacity for loss absorption, three in the area of maturity, and one on tax gross-up. It also stresses the areas where further work from EBA is ongoing. EBA plans further work on general consistency with own funds clauses and existing recommendations from the EBA in this field (including those provided via the additional tier 1 standard templates, for example) if deemed relevant to eligible liabilities instruments. In particular, the report highlights the importance of providing further guidance on the interaction between the clauses used for environmental, social, and governance (ESG) capital issuances and the eligibility criteria for eligible liabilities instruments, with the objective of ensuring that these eligibility criteria for the instruments are not affected..


    EBA has developed this report in accordance with Article 80(1) of the Capital Requirements Regulation (CRR). To perform its monitoring function, EBA has focused its work on the assessment of selected TLAC- and MREL-eligible liabilities instruments. EBA has designed specific assessment templates to drive the analysis of instruments. For this report, EBA has analyzed 27 transactions issued in 14 jurisdictions for a total amount of approximately EUR 22.75 billion, which is composed of EUR 21 billion senior non-preferred issuances and EUR 1.75 billion senior holding company issuances. The scope of the monitoring has been limited for now to these two types of issuances. In general, EBA observes that European banks have not waited for the adoption of the new banking package to start issuing MREL and TLAC instruments. However, EBA observes that, so far, in terms of legal drafting of the notes and programs, market participants have used quite simple and standardized provisions. This is conducive to legal certainty and reliability at the point of resolution. 

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    Keywords: Europe, EU, Banking, TLAC, MREL, CRR, BRRD, Basel, ESG, Green Bonds, Regulatory Capital, EBA

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