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EU loss-absorbing capacity requirement: final MREL guidelines

By , , ,

On 3 July 2015, the EBA published the final technical standard on the criteria for determining the minimum requirement for own funds and eligible liabilities for bail-in – the so-called MREL. With the MREL, European authorities seek to ensure that banks have enough liabilities to absorb losses in case of a bank’s failure. It will enter into force in 2016.


 

On 3 July 2015, the European Banking Authority (EBA) published the final technical standard on the criteria for determining the minimum requirement for own funds and eligible liabilities for bail-in – the so-called MREL. With the MREL, European authorities seek to ensure that banks have enough liabilities to absorb losses in case of a bank’s failure. Resolution tools, including the bail-in tool, can be applied effectively and, therefore, shareholders and creditors shoulder much of the recapitalisation burden instead of taxpayers.

Aimed at ensuring a harmonised application throughout Europe, the EBA sets five criteria for its determination:

 

  • The default loss absorption amount is the capital requirement currently applicable to an institution or group. An upward or downward adjustment may take place depending on the Supervisory Review and Evaluation Process (SREP) recommendations which will take into account the idiosyncratic characteristics of each institution,
  • The recapitalisation amount is the amount necessary to satisfy applicable capital requirements necessary to comply with the conditions for authorization after the implementation of the preferred resolution strategy,
  • The DGS adjustment the MREL may be lowered according to the resolution authority’s assessment on the contribution of the DGS in resolution process,
  • In order to comply with the principle of No Creditor Worse off than in Liquidation (NCWO), the resolution authority may assess whether senior unsubordinated debt could be MREL-eligible,
  • The resolution authorities should assess whether the level of MREL is sufficient to ensure the conditions for use of the resolution fund and the contribution to loss absorption and recapitalization be not less than 8% of the total liabilities.

 

The MREL could be seen as the European Union’s counterpart to the FSB’s TLAC. However, despite having the same purpose, both ratios are different due to their scope and their definitions. Among others, TLAC is limited to G-SIBs, is based on a common minimum requirement to all G-SIBs, and will not apply before 2019. Conversely, the MREL applies to all EU banks regardless their systemic footprint, its calibration will be set on a case-by-case basis, and its application will be much earlier, from 1 January 2016 with a transitional period of 48 months.

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