Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.4:2.5.3.4 Changes to MREL under BRRD II and SRMR II

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.4

2.5.3.4 Changes to MREL under BRRD II and SRMR II

Documentgegevens:

mr. M. Louisse-Read, datum 01-06-2020

Datum: 01-06-2020
Auteur: mr. M. Louisse-Read
JCDI: JCDI:ADS213956:1
Vakgebied(en): Financieel recht / Europees financieel recht
Staatssteun (V)

Under BRRD II and SRMR II, the MREL is still set at the amount necessary to (i) absorb losses and (ii) recapitalise the bank, so that following resolution, it complies with the continuing authorisation requirements in accordance with CRD V.1 If the resolution strategy for a certain bank is liquidation instead of resolution, the recapitalisation amount may be zero.2 The criteria that the resolution authorities need to take into account in determining the MREL level, as described in section 2.5.1, are also still the same.3 Different is that BRRD II and SRMR II provide that the MREL should be expressed as a percentage of the TREA and of the total exposure measure4 of the relevant bank, instead of the total liabilities and own funds of the bank.5

As set out in section 2.4.1, the average ratio of TREA to total liabilities and own funds of a bank differs depending on the bank size. Expressing the MREL as (fixed) percentage of the TREA, instead of the total liabilities and own funds of the bank, will lead to relatively higher requirements for smaller banks.6 In addition, according to Hellwig it seems clear that the choice between risk-weighted and total assets for MREL is likely to matter most for those institutions that have large portfolios of assets that are privileged in the regulation.7

In addition, BRRD II and SRMR II set further variables for the calculation of the MREL dependent on whether the relevant entity is a resolution entity or not. For certain resolution entities a minimum MREL level is determined. Furthermore, BRRD II and SRMR II set further restrictions in respect of the own funds and eligible liabilities that can be used to meet the MREL, including, in certain cases, a subordination requirement.

Table 2 provides an overview of the MREL provisions under BRRD II in respect of the eligible liabilities and funds that can be used to meet the MREL.

Table 2:Overview of provisions under BRRD II in respect of the eligible liabilities and own funds that can be used to meet the MREL8


	Resolution entities				Entities that are not resolution entities
	G-SIIs	Resolution entities that are part of a resolution group of which the assets exceed EUR 100 billion	Resolution entities assessed as reasonably likely to pose a systemic risk in the event of its failure	Other resolution entities
Eligible liabilities and own funds	BRRD II, Article 45b(1) second paragraph Eligible liabilities as defi ned in Article 72k CRR and determined in accordance with Chapter 5a of Title I of Part Two CRR can be used to meet the MREL.	BRRD II, Article 45b(1), (2), (3) See section 2.5.3.2 for the eligible liabilities that are in scope of Article 45b(1) and (2) BRRD II. Article 45b(3) BRRD II specifi es when liabilities that are issued by a subsidiary established in the EU to an existing shareholder that is not part of the same resolution group can be used to meet the MREL.			BRRD II, Article 45f(2) See section 2.5.3.2 for the eligible liabilities that are in scope of Article 45f(2) (a) BRRD II. Article 45f(2) (b) BRRD II specifi es which own funds can be used to meet the MREL.
Subordination requirement	BRRD II, Article 45b(4), (7), (8), (9) 8 % of the total liabilities, including own funds, shall be met by using own funds, subordinated eligible instruments, or liabilities issued by a subsidiary in the EU to an existing shareholder that is not part of the same resolution group (MREL minimum Pillar 1 subordination policy). The resolution authority may permit otherwise. In addition, a sub-set of G-SIIs and top-tier and other systemic relevant banks163 may be faced with an additional Pillar 2 subordination requirement. For resolution entities that are part of a resolution group of which the assets exceed EUR 100 billion the resolution authority has to limit the subordination requirement where this leads to a requirement greater than 27% of the TREA.			BRRD II, Article 45b(5), (9) The resolution authority can decide that subordination is required for liabilities in order to qualify as eligible liabilities	N/A

Table 3 provides an overview of provisions under BRRD II in respect of the MREL application and calculation.

Table 3: Overview of provisions under BRRD II in respect of the MREL application and calculation9

	Resolution entities				Entities that are not resolution entities
	G-SIBs	Resolution entities that are part of a resolution group of which the assets exceed EUR 100 billion	Resolution entities assessed as reasonably likely to pose a systemic risk in the event of its failure	Other resolution entities
MREL calculation	BRRD II, Article 45c, 45d, 45e G-SIBs should at all times meet the minimum MREL level.10 The resolution authority can set an additional requirement.11	BRRD II, Article 45c(3), 45e			BRRD II, Article 45c(7), 45f
		The MREL as a percentage of the TREA should be calculated as the sum of: (i) The loss absorption amount that corresponds to the total capital ratio of 8 % and the Pillar 2 requirement; and (ii) The recapitalisation amount that allows the resolution group resulting from resolution to restore compliance with the total capital ratio of 8 % and the Pillar 2 requirement after the implementation of the preferred resolution strategy.12 The MREL as a percentage of the total exposure measure should be calculated as the sum of: (i) The loss absorption amount that corresponds to the leverage ratio requirement; and (ii) The recapitalisation amount that allows the resolution group resulting from resolution to restore compliance with the leverage ratio requirement after the implementation of the preferred resolution strategy.
Minimum MREL level	BRRD II, Article 45d(1)(a) - 18% of the TREA; and - 6.75% of the total exposure measure	BRRD II, Article 45c(5)	BRRD II, Article 45c(6)	N/A	N/A
		- 13.5 % of the TREA; and - 5% of the total exposure measure

Toon alle voetnoten

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BRRD II, Article 45b(2).

BRRD II, Article 45b(2) second paragraph.

BRRD II, Article 45c(1) and (8).

The total exposure measure is calculated in accordance with Articles 429 and 429a CRR II. Joosen clarifies that the MREL should be calculated as the highest of the percentage of the TREA or the total exposure measure (Joosen TvFR 2019, p. 301).

BRRD II, Article 45. SRMR II, Article 12a.

Berger, Hüttl and Merler Bruegel Policy Contribution 2016, p. 5.

Hellwig 2016, p. 20.

This table and table 3 only refer to BRRD II in order to support the readability of the tables. Under SRMR II, the MREL provisions are included in Articles 12 to 12k. Article 45m BRRD II and Article 12k SRMR II provide for a transitional regime that is not included in this table.

Article 45m BRRD II and Article 12k SRMR II provide for a transitional regime.

10.

Unless Article 92a(2) or (3) CRR II is applicable. In addition, Article 494 CRR II provides for transitional provisions.

11.

BRRD II, Article 45d(3).

12.

This amount can be increased by an appropriate amount necessary to ensure that, following resolution, the entity is able to sustain sufficient market confidence for an appropriate period, which shall not exceed one year (BRRD II, Article 45b(3) sixth paragraph).