Currently, minimum requirements for own funds and eligible liabilities (MREL), as introduced by the Bank Recovery and Resolution Directive (BRRD), are defined individually for each EU institution as a Pillar-2 measure only. The Basel Committee on Banking Supervision’s (BCBS’s) standard on total loss-absorbing capacity (TLAC) holdings calls for all global systemically-important banks (G-SIBs) to hold 16 % of risk-weighted assets (RWA) and 6 % of the total exposure measure (as defined for the leverage ratio) for loss absorption by 2019.
In fact, the first of the measures under the banking package to become applicable are the newly harmonized rules for TLAC and MREL. The new TLAC/MREL entered into force on 27 June 2019, 20 days after the publication of the revisions to the CRR in the Official Journal of the EU, and delivered a clear definition of all the liability components eligible for resolution. Furthermore, the new regulation instructs the national resolution authorities in the handling of resolutions through guidelines defining hierarchies of creditors and liabilities.
In the CRR II, a minimum TLAC is mandatory for all global systemically-important institutions (G-SIIs). Starting from 2022, the minimum required TLAC will be 18 % of RWA and 6,75 % of total exposure for G-SIIs based in the EU. Affiliated financial institutions operating in the EU of third-country G-SIIs must comply with the regulation by holding at least 90 % of the required TLAC. MREL, on the other hand, will continue to be set individually for each institution by its resolution authority, except for so-called “top-tier” institutions, which have total assets of at least €100bn. According to the CRR II, top-tier institutions will also have to comply with a minimum of 13,5 % of RWA and 5 % of total exposure starting in 2022. In addition, as a backstop measure, all G-SIIs, top-tier institutions, and other institutions deemed as relevant with respect to resolution must ensure a sufficiently subordinated MREL of 8 % of total liabilities, including own funds (TLOF) (unless otherwise sanctioned by the resolution authority).
Supervisors currently require large European banks to hold on average 10,5 % of common-equity Tier-1 capital (CET1) (according to SAFE Policy Report No.1| March 2019 p. 55), so that this same “average” institution will need to provide additional own funds and eligible liabilities of 7,5 % of RWA plus a minimum of 2,75 % of total exposure starting from 2022.
With respect to reporting requirements, TLAC data will be collected together with the common reporting (CoRep) according to implementing technical standards outlining the details of content, format and frequency to be provided by the European Banking Authority (EBA) within 12 months of entry into force of the CRR II. MREL reporting according to Art. 45i of the BRRD II will be semi-annual for the sum of the “bail-in” liabilities and annual for the details of subordination and maturity. In addition, disclosure requirements for TLAC will be semi-annual and for MREL annual.
With the introduction of the new regulation, TLAC/MREL liabilities will have to comply with more stringent criteria, i.e., repurchase or repayment measures must be agreed to by the competent authorities. Derivatives will be excluded. For all the instruments issued after 31 December 2021, the subordination of the liabilities must be written down in the contract conditions or defined by law. TLAC holdings, that is, investments in TLAC liabilities of G-SIIs, must be deducted from the institutions own TLAC liabilities. The EBA must decide whether this policy will be extended to other systemically-important institutions (O-SIIs) within the next three years.
The new TLAC/MREL requirements are no small challenge for banks. In addition to the requirements for data systems and automation processes, the new regulation requires preliminary work to ensure the correct application of the new definitions and categorization of liabilities. Finally, the implementation of TLAC and MREL will likely have an impact on middle- and long-term financing operations and strategies. Large institutions will have to put in place consistent and reliable implementation plans as soon as possible.