European Union: European Banking Authority Publishes Final Report On MREL Framework

On December 14, 2016, the EBA published its final Report on the design and implementation of the minimum requirement for own funds and eligible liabilities framework. MREL is the EU equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. The Report is addressed to the European Commission following publication of its proposed banking reform package on November 23, 2016 which included proposals to amend the Bank Recovery & Resolution Directive and the CRR to integrate the TLAC Standard into the EU's MREL framework. The EBA does not currently consider that any changes to the key principles underlining the RTS (adopted by the Commission in May 2016) on the criteria for setting MREL are needed. The Report does, however, identify changes with a view to improving the technical soundness of the MREL framework and implementing the TLAC Standard as a key component of that framework. The EBA has made recommendations on twelve topics.

The EBA recommends, among other things, that the reference base for the MREL requirement be changed from total liabilities and own funds to risk-weighted assets, with a leverage ratio exposure backstop requirement, to align regulatory capital requirements with that of MREL requirements. The EBA is also recommending changes to the MREL stacking order, such that banks in the EU should not be able to count Common Equity Tier 1 capital towards MREL while also using such capital to meet regulatory capital buffers. The EBA also recommends that if regulators and resolution authorities become aware of any potential breaches of capital or MREL requirements through their monitoring processes, they should be required to inform each other.

On redemption and maturity management, the EBA is recommending that the legislative framework should contain a requirement for resolution authorities to monitor the maturity profile of the MREL-eligible instruments of each institution for which an MREL requirement has been set. The legislative framework should also include a power for the resolution authority to modify the maturity profile of its MREL stack. The EBA also recommends that a redemption approval regime be introduced for MREL-eligible instruments.

With regard to the treatment of cross-holdings of MREL eligible instruments, the EBA recommends that exposures to MREL-eligible instruments issued by all banks should be deducted from MREL on a like-for-like basis above a double threshold meant to preserve a share of market-making activity.

The EBA made a number of recommendations on the level and form of subordination. On the level of subordination, amongst other things, the EBA recommends that under the revised framework, global systemically important banks should be required to meet their MREL with subordinated instruments, at least to a level of 16% of RWAs in 2019 and 18% of RWAs in 2022 in line with the TLAC term sheet. The EBA did not recommend a particular form of subordination; however, the various national options for statutory subordination should be harmonized.

The EBA recommends the introduction of third country recognition requirements and a reduction in the burden of compliance for such recognition. This could be achieved by narrowing the scope of requirements and maintaining the effectiveness of contractual recognition of MREL liabilities.

In addition, the EBA recommends that the adequacy and calibration of MREL should be closely linked to, and justified by, the bank's resolution strategy.

On intragroup issues, the EBA proposes that amendments be made to the MREL framework to provide for the identification of resolution authorities and the allocation of internally issued subordinated MREL at the non-resolution- entity level.

The EBA recommendations cover reporting issues, in particular, the introduction of an explicit obligation for banks to regularly report their level and composition of their MREL liabilities (as well as those required from them by their resolution authorities). The EBA also makes recommendations on disclosure requirements during the steady state and the transitional period. In the steady state, the EBA recommends that EU banks should be required to disclose the quantum and composition of their MREL-eligible liabilities including the MREL required from them by their resolution authorities. During the transitional period, and pending the recommendation from the Basel Committee, banks in the EU should be required to disclose to investors the quantum and composition of their stack of MREL-eligible liabilities, as well as information on the creditor hierarchy (at a minimum).

The European Parliament and Council will continue to deliberate on the Commission's legislative proposals over the coming months. The Report is not binding on the Commission; however, the EBA is confident that the Report will assist in providing information on technical aspects that are not yet final. The Commission's proposals forecast the publication of reports on the implementation and impact of MREL by the EBA every other year, with additional reports to be published at the EBA's discretion.

The Report is available at: ;  the Q&A is available at:  and further information on the Commission's banking reform package is available at: .

You might like to view our client note - Implications for Bank Creditors: the Latest EU Banking Reform Proposals, available at:  .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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