MREL review proposal: where do we stand?

13 April 2017

massimiliano.coluccia@prometeia.com

The Single Resolution Board is working on the MREL calibrations to be applied to significant institutions. In the meantime the rules on the new requirement on loss absorption capacity, as defined in 2016, is being amended within the review proposal concerning some parts of the Single Rule Book submitted by the EU Commission

With the publication in May 2016 of the delegated act of the EU Commission [1] describing the coefficient calibration criteria, the MREL regulatory framework can be considered completed (MREL - Minimum Requirement for own funds and Eligible Liabilities) [2]. The requirement will be calculated by the Resolution Authority (Single Resolution Board, SRB, for banks directly supervised by the ECB). It will be equal to the amount for loss absorption, plus the amount required to recapitalize the bank after resolution, on top of any add-on to sustain sufficient market confidence (equal to capital buffers).

However, no binding threshold was set in 2016, except for information targets (not mandatory) for the significant banks, in order to allow intermediaries to prepare for their future MREL requirements. MREL calibration is very complex because it requires a case-by-case assessment, along with resolution scenario analysis for each bank. The SRB will communicate mandatory consolidation thresholds at the end of 2017 to the banks that fall under its competence, and it will identify individual targets only later on [3].

After only seven months from the completion of the legislative process, the MREL discipline has been modified within the proposal of the EU Commission to review some parts of the Single Rule Book [4]. One of the objectives of the review is to standardize the requirements for loss absorption capacity (MREL and TLAC) in order to avoid a duplication by applying, for global systemically important institutions (G-SII), two coefficients that are similar in their aim, but quite different in their definition.

The main modifications that will be implemented by amendments to the BRRD directive concern the structure of the requirement, the scope, the consequences of violations, supervisory reporting and public disclosure. In particular, the MREL will be expressed in percentage of RWA (or of the leverage ratio exposure) and no longer of total liabilities and own funds. 

For the G-SII the coefficient will be equal to TLAC (Total Loss Absorbing Capacity), with the possibility for resolution authorities to apply a specific add-on. Instead, for non systemic banks an assessment will be made to find out if the bank is a resolution entity (company of the group to which the resolution procedures would apply). In such a case, MREL will be calculated as the sum of the amount for loss absorption (expected in resolution) and the recapitalization amount (that allows the institution to meet its own funds requirements after the resolution), without considering capital buffers, as it is the case now. For banks that are not resolution entities, the MREL (i.e.: internal MREL) will consist of liabilities issued within the group and purchased by the resolution entity [5]. 

The proposal also identifies two aspects that are not regulated by the BRRD, i.e. the powers of resolution authorities in case of breach of the MREL (early intervention measures, administrative sanctions and limitations to dividends/coupons, the latter if the non compliance lasts over six months) and the obligation of banks to communicate their MREL, the maturity profile and the position in the creditor hierarchy of their eligible liabilities annually.

 
Fig. 1: flowchart of the MREL legislative process
^ same as TLAC for G-SII (with leverage ratio exposure backstop and possible add-on by resolution authorities). With regard to the other banks (which are resolution entities) the suggested formula is: MREL = Loss Absorption amount + Recapitalisation amount = Max {2 * (Pillar 1+ Pillar 2R); 2 * Leverage ratio} [art.45c and 45d EU Commission’s proposal amending BRRD, 23rd  November 2016]
 

The Commission’s proposal will introduce important novelties to the MREL discipline, but it is unsure when the legislative process will be completed: amendments have been submitted to the Parliament and to the European Council, which will have to reach an agreement on a shared and agreed upon text (before moving on to final ratification).

The proposal has been formulated so that it can enter into force in 2018. Hopefully timelines will be respected, given the impact that MREL could have on banks’ activity and, more specifically, on the cost of funding. On the impact of MREL, the role of EBA will be crucial as, every two years, it will have to submit a detailed report on the effect of the new requirement on the cost of funding, on credit extension, especially to small and medium size enterprises, and more generally on banks’ balance sheets.


[1] Delegated regulation (EU) 2016/1450 dated 23rd May 2016.

[2] MREL is a requirement introduced by the European directive on recovery and resolution of banks (BRRD), with the goal of ensuring the application of the bail-in mechanism. It is a second pillar requirement, thus it varies from bank to bank, and it is calculated as an amount of own funds and liabilities expressed in percentage of total liabilities and own funds. See http://www.prometeia.it/en/atlas/MREL-requirement-new-restriction

[3] https://srb.europa.eu/sites/srbsite/files/srb_mrel_approach_2016_post_final.pdf

[4] The EU Commission proposal, dated 23rd November 2016, contains amendments to: the regulation (CRR) and the directive (CRD) on financial requirements, the recovery and resolution of banks directive (BRRD) and the regulation concerning the single resolution mechanism (SRMR).

[5] Resolution authorities will be entitled to set an add-on (see MREL guidance) whose violation will not trigger automatic limitations to the distribution of dividends/coupons. However, if a bank consistently fails to meet the additional requirement, the resolution authority may require that the MREL be increased to cover the amount required as an add-on.