How to ensure enough Loss Absorbing Capacity: From TLAC to MREL

Transcription

1 How to ensure enough Loss Absorbing Capacity: From TLAC to MREL Nikoletta Kleftouri European Banking Authority 13 December 2016 FINSAC Workshop on bail-in and MREL

2 Plan 1. Why do we need loss absorbing capacity? 2. What has been done so far? 3. What s next? 2

3 Why do we need loss absorbing capacity? 3

4 1. Why do we need loss absorbing capacity? LAC It ensures that institutions failure can be managed in an orderly way, while minimising risks to financial stability, disruption to critical economic functions, and risks to public funds. It is necessary to make resolution strategies credible. Institutions should have in place adequate stock of liabilities that can be used to cover losses and recapitalisation needs in resolution. 4

5 1. What is loss absorbing capacity? PLAC SLAC GLAC GCLAC TLAC MREL 5

6 What has been done so far? 6

7 2. Regulatory timeline Publication of BRRD FSB TLAC EBA MREL report TLAC enters into force Jun 2014 Nov 2015 July 2016 Dec 2016 Jan FSB published TLAC term sheet Interim report Final report TLAC enters info force Draft RTS on MREL Jul 2015 Bail-in provisions Jan 2016 RTS on MREL endorsed May 2016 COM legislative proposals Nov 2016 EBA published draft RTS Commencem ent of bail-in provisions COM endorsed EBA RTS on MREL COM published a legislative proposal on TLAC implementation in the EU 7

8 2. TLAC standard In November 2015, the Financial Stability Board (FSB) published its final Total Loss Absorbing Capacity (TLAC) standard for G-SIBs TLAC can be met with capital or other unsecured long-term liabilities A common minimum level and a firm-specific add-on Minimum TLAC of at least 16% of the resolution group s RWAs from January 2019 and at least 18% from January 2022 External TLAC requirements apply to resolution entities Internal TLAC requirements apply to material sub-groups Subordination required: 3 types (of structural, statutory, contractual) allowed 8

9 2. TLAC level of application Where should TLAC be located? Single Point of Entry (SPE) Resolution entity and material subgroup Multiple Point of Entry (MPE) Internal TLAC External TLAC Resolution entity External TLAC Resolution entity I Internal TLAC Subsidiary F Subsidiary D Material sub-group Subsidiary A Subsidiary C Subsidiary B External TLAC Resolution entity II Internal TLAC Resolution Group I Resolution Group Subsidiary E Resolution Group II 9

10 2. Purpose of MREL The purpose of MREL is to ensure that banks hold sufficient amounts of regulatory capital instruments and eligible liabilities for loss absorption and recapitalisation The BRRD does not foresee a harmonised minimum level of bail-in eligible instruments at the level of individual banks RAs should consider a list of criteria when determining MREL BRRD Recital 79 To avoid institutions structuring their liabilities in a manner that impedes the effectiveness of the bail-in tool it is appropriate to establish that the institutions meet at all times a minimum requirement for own funds and eligible liabilities (MREL) 10

11 2. Setting MREL ensure that the institution can be resolved BRRD criteria to set level of MREL ensure losses can be absorbed and CET1 ratio restored size, business model, funding model, risk profile potential Deposit Guarantee Scheme contribution extent of adverse effects on financial stability Who determines MREL? Resolution authority after consulting competent authority Joint Decision process in Resolution college if applicable EBA mediation if needed 11

12 2. MREL level of application Where should MREL be located? Individual (parent and subsidiary) and consolidated level Consolidated level Parent GLRA NRA Subsidiary A Subsidiary B NRA 12

13 2. MREL calibration 1 Liabilities excluded from bail-in (Article 44(2&3) BRRD) Liabilities Bail-in eligible liabilities 2 MREL eligible liabilities MREL eligible liabilities Article 45(4&5) BRRD Equity Own funds Own funds CET1 capital Additional Tier 1 Tier 2 Balance sheet Loss absorbing amount MREL amount Bail-in eligible liabilities > MREL eligible liabilities 13

14 2. Liabilities excluded from bail-in (Article 44(2)) 1 Covered deposits Secured liabilities (including covered bonds) Client assets or client money Liability that arises by virtue of a fiduciary relationship Liabilities to institutions (excluding entities that are part of the same group) with an original maturity < 7 days Liabilities with a remaining maturity <7 days (owed to payment systems or securities settlement systems) Salaries, pension benefits or other fixed remuneration of employees Operational liabilities (IT services, utilities and the rental, etc.) Tax and social security authorities (if preferred under the applicable law) Deposit Guarantee Scheme contributions due 14

15 2. Constrained discretion (Article 44(3)) 1 RA may exclude certain liabilities from bail-in: If not possible to bail-in within a reasonable time To achieve the continuity of critical functions or core business lines To avoid contagion which would disrupt the functioning of financial markets To avoid destruction in value If resolution authority decides to exclude certain types of liabilities the level of bail-in applied to other eligible liabilities may be increased subject to No Creditor Worse Off (NCWO) safeguard 15

16 2. MREL eligible liabilities (Article 45(4)) 2 Conditions for instruments to be included into amount of MREL: be issued and fully paid up not owed to, secured by or guaranteed by the institution itself purchase of the instrument not be funded by the institution remaining maturity > 1 year not arise from a derivative not arise from a deposit which benefits from preference in the national insolvency hierarchy in accordance with Article 108 Liabilities under third country law (Article 45(5)): Where a liability is governed by the law of a third-country, resolution authorities may require the institution to demonstrate that any decision of a resolution authority to write down or convert that liability would be effective under the law of that third country 16

17 Methodology for setting MREL Loss absorption amount Determination of loss absorption amount Determination of recapitalisation amount Exclusions from bail-in SREP adjustment Size and systemic risk consideration DGS adjustment RA requests from competent authority (CA) currently applicable capital requirements: Default loss absorption = higher amount + + Own funds requirement Any Pillar 2 requirement Combined buffer requirement Basel I floor Leverage ratio If applicable Total capital: 8% x RWA (=total risk exposure amount) Tier 1: 6% x RWA CET 1: 4.5% x RWA Capital conservation buffer Countercyclical capital buffer G-SII/O-SII buffer Systemic risk buffer Art. 500 CRR 17

18 2. Methodology for setting MREL Loss absorption amount RA may set: + + Determination of loss absorption amount Determination of recapitalisation amount Exclusions from bail-in SREP adjustment Size and systemic risk consideration DGS adjustment Higher loss absorption (LAA) amount Default amount See last slide Lower loss absorption amount Based on SREP (business model, funding model, risk profile) To reduce or remove impediments to resolvability Absorb losses on holdings of MREL instruments issued by other group entities Pillar 2 requirements determined from stress test or to cover macroprudential risks If part of combined buffer requirement is not relevant If setting higher or lower loss absorption amount RA should provide CA with a reasoned explanation 18

19 + 2. Methodology for setting MREL Recapitalisation amount Determination of loss absorption amount RA shall determine an amount of recapitalisation to allow the implementation of preferred resolution strategy + Determination of recapitalisation amount Exclusions from bail-in SREP adjustment Size and systemic risk consideration DGS adjustment Comply with the conditions for authorisation Sustain sufficient market confidence Capital position vs peer group Combined buffer requirement or Lower if: Combined buffer requirement Default amount Enough sustain market confidence Ensure provision of critical functions and access to funding 19

20 Methodology for setting MREL Recapitalisation amount Determination of loss absorption amount Determination of recapitalisation amount Resolution strategies: Small bank 1 Liquidation Recapitalisation Loss absorption Exclusions from bail-in SREP adjustment Medium size bank 2 Resolution, only partial recapitalization Recapitalisation Loss absorption Size and systemic risk consideration Large bank 3 Resolution with full recapitalization Recapitalisation Loss absorption DGS adjustment 20

21 2. Methodology for setting MREL Size and systemic risk + + Determination of loss absorption amount Determination of recapitalisation amount Exclusions from bail-in SREP adjustment Size and systemic risk consideration DGS adjustment For G-SIIs or O-SIIs and any other institution which CA or RA considers reasonably likely to pose a systemic risk in case of failure, RA shall take into account the requirements set out in Article 44 of the BRRD 8% is not a minimum requirement, but a criterion that RA needs to consider in particular when an institution s own resources are not sufficient and resolution financing arrangements could need to be accessed Where joint decision on MREL is required, any downward adjustment to estimate capital requirements after resolution should be documented and explained to resolution college members 21

22 2. Methodology for setting MREL Combined assessment RAs must ensure: MREL (Amount of own funds and qualifying eligible liabilities) Loss absorption amount + Recapitalisation amount ± Exclusions from bail-in SREP adjustment Size and systemic risk consideration DGS adjustment MREL to be expressed as a percentage of total liabilities and own funds: MREL Total liabilities and own funds 22

23 2. MREL vs TLAC MREL TLAC Legal basis Legal requirement in the EU G20 agreement Scope EU banks and investment firms G-SIBs Level of application Solo and consolidated Resolution entities (external TLAC) requirements Material sub-groups (internal TLAC) Implementation 1 January 2016 * Phase in Ratio Loss Absorption amount + Recapitalisation amount : 16% RWAs and 6% leverage ratio 2022: 18% RWAs and 6.75% leverage ratio leverage ratio Use of resolution fund Min 8% TLOF** contribution N/A Pillar 1 vs Pillar 2 Pillar 2 (EBA RTS on MREL) Pillar 1 + Pillar 2 Denominator Own funds + total liabilities RWAs and leverage ratio denominator Subordination Not mandatory Mandatory (limited exclusions) (may be required) Minimum debt No guidance Minimum 33% Buffers No guidance CET1 buffers on top of TLAC Disclosures No guidance Required Deductions No guidance Deduction regime under consultation * Resolution authority may determine appropriate transitional period ** Total liabilities including own funds 23

24 2. EBA report on MREL implementation and design Article 45(19) BRRD mandate National implementation of MREL Requirements for contractual bail-in MREL for identified business models Appropriate transitional periods Adequacy of loss absorbing capacity Calculation methodology Appropriate MREL denominator Group MREL Possible need for waivers Requirement for contractual bail-in instruments Disclosure of MREL Article 45(20) BRRD mandate Assess impact on: Financial markets Balance sheet structure, business models Profitability Risk migration Financial innovation Risk taking Asset encumbrance Compliance actions by banks Lending Interaction with leverage ratio and liquidity requirements Bank funding Consistency with international standards Challenges included Delays in the BRRD transposition Delays in establishing resolution colleges No NRA decisions on MREL to date MREL policies not settled or communicated MREL transitional arrangements 24

25 2. EBA report on MREL-provisional recommendations Reference base RWAs Complemented with a leverage ratio exposure backstop Relationship with regulatory requirements Buffers on top of MREL Interaction with MDA restrictions and SREP should be carefully considered Breach of MREL RA responsibility and in the lead, but close cooperation and coordination Accelerated process for use of powers to address impediments to resolvability Trigger for use of early intervention powers Potential assessment of whether the institution is failing or likely to fail 25

26 2. EBA report on MREL-provisional recommendations (cont d) Adequacy and calibration Calibration linked to resolution strategy Current MREL assessment framework (Art. 45 and RTS) be retained for setting Pillar 2 /firm-specific MREL Eligibility Mandatory subordination for at least some banks Subordination requirements should focus on which liabilities MREL should be subordinated to and not on form Disclosure of creditor hierarchy and effects of national insolvency law Third country recognition Reduction of burden of compliance by narrowing the scope of requirement 26

27 What s next? 27

28 3. What s next? EU TLAC finalisation and implementation (2017?) EBA final report on MREL (2016) Finalisation of MREL policies (2017?) Setting of MREL (incl. joint decisions) (2017?) Monitoring and enforcement of MREL 28

29 Q&A

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