Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.4:2.5.4 Measures in case of breach of MREL

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.4

2.5.4 Measures in case of breach of MREL

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Although the BRRD and the SRMR are clear that MREL is a minimum requirement that must be met at all times,1 they do not contain specific provisions covering the implications of an MREL breach. Nonetheless, there are a number of actions that could be envisaged under the BRRD/SRMR in case of a (likely) breach of the MREL.2

As flagged by Philippon and Salord,3 the balance sheets of banks may not be quite ready for the MREL. It can be read in the Quantitative Update of the EBA MREL Report that challenges relate both to the MREL amount and the MREL composition. The financing need of the 112 EU banks in the EBA sample (60% of the total EU banking sector’s assets) to meet the MREL ranges between EUR 131.6 billion and EUR 250.8 billion depending on which scenario is used.4 In addition, certain banks are characterized by the predominance of deposits covered by a deposit guarantee scheme or preferred retail deposits in the funding structure and limited or non-existent experience in issuing debt instruments. This affects the banks’ abilities to meet the MREL and, in the end, the resolvability of these banks.5

The resolution authority could deal with a breach of the MREL as part of its powers to address or remove substantive impediments to resolvability. It can, for example, require a bank to issue eligible liabilities to meet the MREL requirement or to renegotiate any eligible liability, AT1 or Tier 2 instrument it has issued to meet the MREL requirement.6 This can however only be done after an assessment of the resolvability has been made and the bank has not removed the impediments itself within a four months’ period. Additional powers may be available under the BRRD, such as the power to request a bank to submit a plan to restore compliance with the MREL requirement or to impose administrative penalties, but the scope of these additional powers is unclear and partly depends on the implementation in national law.7 In addition, a significant deterioration in the MREL may be a trigger for the competent authorities to use the early intervention powers, as described in section 2.4.7.2.8 Lastly, breach of the MREL may contribute to the finding that a bank is failing or likely to fail and should be put in resolution.9

The EBA considered that these aforementioned measures are insufficient for resolution authorities to deal with MREL breaches in an efficient way. It therefore suggested that resolution authorities should be given enhanced powers to address breaches of the MREL.10BRRD II and SRMR II introduce the requirement for relevant authorities to address any breach of the MREL through at least one of the following: powers to address or remove impediments to resolvability, powers to prohibit certain distributions, supervisory measures, early intervention measures, administrative penalties or other administrative measures.11

The powers to prohibit certain distributions is a new power intro duced by BRRD II and SRMR II. The resolution authorities shall have the power to prohibit a bank from distributing more than the MDA related to the MREL (the M-MDA) through making a distribution in connection with CET 1 capital, through creating an obligation to pay variable remuneration or discretionary pension benefits or to pay variable remuneration – if the obligation to pay was created at a time when the entity failed to meet the combined buffer requirement –, or through making payments on AT 1 instruments. The resolution authorities can exercise this power when a bank does not have own funds and eligible liabilities in an amount and of the quality needed to meet at the same time the combined buffer requirement and the MREL, but it does not fail to meet the combined buffer requirement under CRD V.12

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