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14 December 2016

EBA makes final recommendations for strengthening loss-absorbing capacity of banks in Europe

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The EBA published its final Report on the implementation and design of the minimum requirement for own funds and eligible liabilities (MREL). The Report quantifies the current MREL stack and estimates potential financing needs of European Union banks under various scenarios.

The European Banking Authority’s (EBA) report is addressed to the European Commission, which issued its banking reform package on 23 November 2016. The European Parliament and Council will deliberate on this package in the coming months and the Report will shed light on a number of technical issues still open for discussion.

Under central estimates, the Report assesses that the financing needs 133 banking groups included in a representative sample would have to meet in order to comply with an assumption-based MREL requirement in the steady phase would range between EUR 186bn and EUR 276bn. Moreover, subject to the assumptions used in the Report, the net macro-economic impact of introducing MREL in the EU is positive and ranges between 17 and 91 basis points of GDP.

The EBA makes a number of recommendations aimed at improving the EU MREL framework to best deliver on the main objectives of the bank resolution reform, namely preserving financial stability, addressing the too-big-to-fail problem and breaking the sovereign-bank nexus. The Report promotes a technically sound implementation of international standards as part of an integrated EU framework in order to avoid banks being faced with two sets of rules.

The recommendations include, inter alia, the following key elements:

  • Reaffirming resolution strategies as the primary driver of MREL calibration - MREL should respect the minimum quantitative requirements laid down in the TLAC term sheet for global systemically important banks (G-SIBs) but should also deliver on the resolution strategy for each firm. Therefore, for G-SIBs, MREL should be set as the higher of minimum quantitative requirements and the amount necessary to meet the resolution strategy of any specific firm.
  • Enhancing resolvability by introducing mandatory subordination requirements - G-SIBs should be subject to a partial subordination requirement of at least 14.5% of RWAs, in line with the Financial Stability Board (FSB) TLAC term sheet. Other systemically important institutions (O-SIIs) could be subject to a partial subordination requirement of 13.5% of risk weighted assets (RWAs) with some flexibility to cater for market capacity and differences in resolution strategies.
  • Improving consistency between MREL and capital requirements - MREL requirements should be expressed as a percentage of RWAs, with a leverage ratio exposure backstop. In order to preserve the usability of capital buffers, CET1 should be prevented from counting towards MREL and capital buffers at the same time. Suggestions are provided to clarify the stacking order between MREL and capital buffers, avoiding that a breach of the MREL requirement can immediately and automatically lead to constraints to distributions.
  • Enhancing transparency to support market discipline and facilitate the emergence of a market for MREL instruments - Credit institutions should be required to disclose MREL requirements and stacks in the steady phase. During the transitional phase of MREL build-up, they should be required to disclose at least MREL stacks and information on the creditor hierarchy.

Press release

Final MREL_report


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