Setting of MREL for subsidiaries of foreign banks

Transcription

1 Setting of MREL for subsidiaries of foreign banks Emil Vonvea, Director, Bank Resolution Department National Bank of Romania FINSAC WORKSHOP ON BAIL-IN AND MREL, Vienna 13 th December, 2016 The opinions expressed in this presentation are those of the author and do not necessarily reflect the views of the National Bank of Romania.

2 Contents I. Outlook on the Romanian banking sector and resolution framework I. Minimum requirement for own funds and eligible liabilities (MREL) I. Resolution planning and MREL 2

3 Outlook on the Romanian banking sector and resolution framework 3

4 Romanian banking system* 36 credit institutions in the sector, of which 7 are branches of foreign banks Banking sector net assets = 82.3 bn EUR equiv. (53% of GDP) Assets of banks with majority foreign capital = 90.3% Bank intermediation level: loans to private sector = 31% of GDP Loan-to-Deposit Ratio = 87% Loans granted to non-banking clients = 51 bn. EUR equiv. Deposits of non-banking clients = 59 bn. EUR equiv. TCR = 19.5% CET 1 and Tier 1 Ratio = 17.2%; lack of hybrid capital instruments NPL ratio = 13.5% at March 2016 (EBA definition) Coverage with provisions of NPLs = 58.2% (EBA definition, IFRS provisions) *As of March

5 EUR bn. Banking sector s assets dynamic Source: NBR 5

6 Banks funding structure Gradual shift between external resources and domestic savings Divergent evolution of banks external and domestic resources, especially starting with Resources from mother banks declined after the Vienna Initiative. Deposits of companies and individual clients increased considerably. Source: NBR 6

7 Capital adequacy ratios Capital adequacy ratios (solvency) have been well above the regulatory levels The strengthening of the capital base after 2008, due to the proactive NBR approach Source: NBR 7

8 Resolution framework in Romania Law No. 312/2015 on the recovery and resolution of credit institutions and investment firms ( transposing BRRD). Two resolution authorities: the National Bank of Romania (NBR) - is the resolution authority for credit institutions and the Financial Supervisory Authority (FSA) - is the resolution authority for investment firms, their powers being established by the aforementioned law. NBR: the resolution function is organised within the Bank Resolution Department. 8

9 Structure of the Romanian banking system December 2015 Number Net assets EUR bill. % I. Credit institutions under the direct remit of the NBR as RA II. Credit institutions that are part of cross-border groups subject to consolidated supervision, under the direct remit of SRB II. Credit institutions that are part of cross-border groups subject to consolidated supervision, under the direct remit of the RA from their home Member States III. Foreign banks branches, supervised by ECB, under the direct remit of SRB IV. Foreign banks branches, supervised by the RA from their home Member States Total number of credit institutions (out of which 7 branches of foreign banks) Source: NBR 9

10 Critical functions for the Romanian market Deposit taking Loan granting Payment services Other functions Households / retail Non-financial enterprises Financial enterprises (other than credit institutions) Households / retail Housing loans (retail) Non-financial enterprises Financial enterprises (other than credit institutions) Public administrations Cash-payment contribution (branches & ATM) Merchant payment contribution (POS) Consumer payment contribution (credit & debit cards) LGs & LCs & other commitments Domestic Bond Market participation (primary & secondary market) Custody assets Intermediation on the interbank market Guarantees issued on behalf and account of the State 10

11 The NBR as Resolution Authority in Romania - Competencies Setting MREL for the institutions that are subsidiaries* of cross-border groups, subject to consolidated supervision - is part of the process for approving resolution plans within the resolution colleges, that are under the direct remit of the SRB or the home country resolution authority. Setting MREL for the credit institutions that are not part of a cross-border group subject to consolidated supervision. *NBR does not set MREL for foreign banks branches. NBR as a resolution authority of branches of cross-border groups is consulted with regard to group resolution plans if it is part of the respective Resolution Colleges. 11

12 Minimum requirement for own funds and eligible liabilities (MREL) 12

13 MREL - definition a loss absorption amount, corresponding in broad terms to the bank s capital requirement, and a recapitalisation amount, corresponding to the amount required to restore its capital to the requirement levels that will apply to the bank after resolution, subject to some potential adjustments. MREL LOSS ABSORPTION AMOUNT (LAA) RECAPITALISATION AMOUNT (RCA) POTENTIAL ADJUSTMENTS 13

14 Eligibility criteria for MREL (1) MREL eligible liabilities: MREL* (%) = Own funds Own funds MREL eligible liabilities Total liabilities the instrument is issued and fully paid up; the liability is not owed to, secured by or guaranteed by the institution itself; the purchase of the instrument was not funded directly or indirectly by the institution; the liability has a remaining maturity of at least 1 year; the liability does not arise from a derivative; the liability does not arise from a deposit which benefits from preference in the national insolvency hierarchy. * EC proposed amendment: MREL should be expressed as a percentage of the total risk exposure amount and of the leverage ratio exposure measure 14

15 Exclusions under BRRD vs MREL Setting MREL requires an assessment of potential exclusions from bail-in. Liabilities excluded from bail-in (mandatory or discretionary) should not be relied on for purposes of meeting the MREL. If the resolution plan anticipates that certain classes of MREL eligible liabilities might be excluded, it must be ensured that sufficient other MREL-eligible liabilities are available for the resolution strategy s implementation. If the liabilities extraordinary excluded > 10% of the liabilities of equal or junior rank in the insolvency creditor hierarchy, RA shall analyze to what extent the exclusions may lead to a breach of the NCWO principle. 15

16 Contributions from DGS vs MREL Regulation prohibits RA to bail-in DGS covered deposits. Instead, DGS will step in and cover the losses that normally DGS covered deposits should bear in insolvency. RA should assess the amount the DGS could contribute to the cost of resolution in stead of covered deposits, had they been included in the scope of bail in. Should this assessment conclude that such a contribution is likely, resolution authorities may choose to set a lower MREL. Any such assumed contribution are likely to be most relevant for institutions funded primarily by covered deposits. 16

17 Risk profile The RA may adjust the level of MREL based on the idiosyncratic characteristics of each institution (i.e. business model, funding model and overall risk profile) using, among others, information from the supervisory review and evaluation process (SREP). In the case of entities which are subsidiaries of a group subject to a consolidated MREL, the RA may exclude any buffer which is set only on a consolidated basis. 17

18 Minimum bail-in rule to access resolution funds When setting MREL for G-SII/O-SII/any institution which is considered likely to pose a systemic risk in case of failure, the RA shall ensure that the criteria for accessing the financing arrangement for resolution are met. If the losses that would have been covered by the excluded liabilities have not been transferred to other creditors, Bank Resolution Fund contributions are only permissible if shareholders and creditors have already contributed an amount to at least 8% of the institution s total liabilities to loss absorption and recapitalisation ( burden sharing clause). Romania: 10 systemically important banks at the end of 2015 (9 banks and 1 branch of foreign banks) 18

19 Resolution planning and MREL 19

20 Phase-in implementation and transitional periods The legislation does not foresee a harmonized minimum level of MREL. A significant phase-in is necessary. RA may determine an appropriate transitional period (which is as short as possible) to reach the final MREL or for an institution or entity to which resolution tools have been already applied. RA shall also communicate to the institution a planned MREL for each 12 month period during the transitional period. 20

21 Preferred resolution strategy for the group vs MREL MREL must be set on a case-by-case basis, depending on the preferred resolution strategy identified for the group in question (SPE or MPE approach). In particular, the RA specifies in the resolution plan which resolution tools should be used. This decision has a major impact on the size of the recapitalisation amount, for example. RA shall set the MREL to be applied to the group s subsidiaries having regard to: - the criteria provided by BRRD, in particular the size, business model and risk profile of the subsidiary, including its own funds; and - the consolidated MREL that has been set for the group 21

22 SPE approach vs MREL Three kinds of general resolution approaches can be distinguished: SPE approach, MPE approach, hybrid SPE/MPE approach. SPE approach: losses incurred within the group are absorbed by the parent company. The SPE strategy should assume: - the availability of sufficient loss-absorbing instruments at the parent entity, - sufficient loss-absorbing instruments at the subsidiary level, - a credible mechanism to upstream losses from subsidiaries to the parent entity and to downstream capital to the subsidiaries who require it. 22

23 SPE approach vs MREL (2) MREL must be set both at consolidated level and individual level regardless of materiality. Internal or external MREL depending on whether entity is a resolution entity (to which resolution tools are expected to be applied) or not: - Resolution entities: issue MREL-eligible liabilities to external parties (external MREL) - Subsidiaries which are not resolution entities: issue subordinated MRELeligible liabilities towards the resolution entity (internal MREL) EC proposed amendments: The concepts of external and 'internal' MREL requirements are introduced for entities belonging to a banking group. The internal MREL could be replaced with collateralised guarantees in a certain extent. 23

24 MPE approach vs MREL The MPE approach is, in general, more likely to be suitable for banks that have material subsidiaries that are independently operated and funded. Within the group, each entity that might be subject to a separate resolution action should have sufficient loss-absorbing instruments at the subsidiary level, to cover its own losses and to be able to be recapitalized if the liquidation is not credible. As a consequence, they would have to issue MREL-eligible liabilities on the local market, BUT the market is very narrow, only 5 banks have issued so far unsecured medium-term bonds that amounts to EUR 0.5 bn (0.8% of total liabilities) as of Dec

25 The MPE becomes SPE resolution strategy A pure MPE strategy would imply issuing debt instruments with higher premiums, that hinders Group s overall profitability as the increased cost of funding would affect heavily net interest margin. In the same time, grounding MREL on local market deposits is not realistic Morevover, operational interdependence within the Group is another reason why a MPE strategy is not feasible. Therefore, the logical approach is that the subsidiaries will rely only on debt instruments issued towards parent entity, making the SPE as the only suitable strategy for cross-border groups both from regulatory and effectiveness point of view. 25

26 Key topics to be addressed First step: setting MREL at consolidated level for the Group. Next: setting MREL for subsidiaries, based on their individual characteristics and the consolidated level which has been fixed for the Group. Technical issues for MREL calibration: subordination requirements, collateralised guarantees, deduction for the cross-holdings. 26

27 Thank you!