December 14, 2016 / 11:27 AM / 8 months ago

EBA gives final verdict on European loss absorbing debt

LONDON, Dec 14 (IFR) - European lenders may have to raise less debt than previously estimated to fulfil new regulatory requirements for loss-absorbing debt, according to a report published by the European Banking Authority on Wednesday.

The 186.1bn-276.2bn range, released as part of the EBA's final report on minimum requirement for own fund and eligible liabilities (MREL), is much narrower than the 130bn-790bn range the watchdog released in a interim report in July.

MREL requires that banks hold sufficient liabilities that can be written down to avoid taxpayers carrying the burden of future bank failures.

"The main reasons why the range is narrower and the figure lower than in our interim report is because we have taken a full consolidated picture of the banks and taken into account the instruments issued at banks' subsidiaries," said Charles Canonne, a policy officer at the EBA.

"We have also considered German senior debt as subordinated for the purpose of this exercise and UK banks holdco debt which is structurally subordinated."

European regulators have been grappling with how to reconcile MREL with global rules on loss-absorbing debt, called TLAC.

The European Commission proposed a new form of loss-absorbing debt for the regions banks at the end of November.

The EBA now hopes that its final proposals on MREL, which are not binding, will feed into the European Parliament and Council legislative process in the coming months.

The report recommends that globally systemically important banks (G-SIBs) meet their MREL with subordinated instruments at least to a level of 14.5% of risk weighted assets (plus combined buffer requirement) in line with the TLAC term sheet.

The EBA suggests extending the requirement for subordinated instruments also to domestic systemically important banks but with some flexibility, taking into account the differences in banks' business model.

The EBA also said that banks would not be able to use their common equity Tier 1 towards MREL and capital buffers at the same time. (Reporting by Helene Durand, Editing by Alex Chambers, Ian Edmondson)

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