Innovations of the banking reform package
On 14 May 2019, the EU Council and EU Parliament adopted a comprehensive Banking Reform Package. This marks the end of the lengthy revision process of BRRD2, CRR2 and CRD V. It will be published in the Official Journal in the course of June and will enter into force 20 days later. The BRRD2 package, in particular, contains ground-breaking innovations for the MREL target setting for banks. Parts of these new regulations may have adverse effects, especially for lower-risk institutions, which may contradict the actual objective of strengthening the financial system.
Introduction of resolution groups as new consolidation groups
According to BRRD2 , the MREL requirements are no longer set at the consolidated group level of institutions and for each legal entity within its scope. Instead, requirements are formulated at the level of resolution entities, consolidated for the respective resolution group. Resolution entities are legal entities within a group of institutions that are identified as a point of entry for resolution measures. Resolution groups are resolution entities together with their subordinated institutions (resolution group entities), which do not themselves represent a point of entry in the event of liquidation, but would only be liquidated via their superordinate resolution entity. In the context of resolution planning, resolution groups are clusters of connected group entities that will be subject of a common resolution strategy.
The MREL requirement will be specified for the Resolution Entity, consolidated for the Resolution Group and for each Resolution Group Entity. At a detailed level, the MREL requirement must ensure that, in the event of liquidation, the losses of the Resolution Group Entities are passed on to the Resolution Entity and that, if a recapitalisation of subsidiaries is needed, the controlling influence of the Resolution Entity is maintained. Consequently, MREL eligible instruments of resolution group entities may only be held by the respective resolution entity (internal MREL). Only for resolution group entities with (minority) shareholders outside the resolution group these same external investors may also hold MREL eligible instruments, but limited to the ratio of their minority shareholdings. Against this background, also the requirements for investors in instruments of additional core capital (AT1) and supplementary capital (T2) have been adjusted.
Introduction of an MREL floor
The new regulatory package provides for a general minimum MREL requirement for G-SIIs and resolution groups with a consolidated balance sheet volume of over EUR 100 billion (in earlier versions of the BRRD2 labelled “top tier institutions”). The minimum MREL requirement is defined for these institutions irrespective of an individual resolution strategy. This MREL floor consists of two dimensions, the Pillar-I-MREL (defined as a ratio with reference to RWA – TREA) and the 8 percent backstop (with reference to the balance sheet total – TLOF).
The requirement of Pillar-I-MREL corresponds to the provisions of the TLAC term sheet for G-SIIs, but is here also applied to top tier institutions. For G-SIIs, the Pillar I MREL requirement is uniformly 18 percent of the RWA or 6.75 percent of the balance sheet total in terms of leverage ratio (13.5 and 5 percent respectively for top tier institutions).
Retail customers as buyers of MREL eligible instruments
The question of the extent to which retail customers may be considered as buyers of MREL eligible instruments, which has been the subject of intense discussion particularly against the background of the Italian bank insolvencies of the last two years, is regulated in the BRRD2 with cross reference to the requirements of MiFID II and by provision specific volume limits.
The detailed article is published in the current issue of "Die Bank".