July 6, 2015 / 8:28 AM / 2 years ago

EBA's MREL paper short on detail

(This story first appeared on the IFR Magazine website, a Thomson Reuters publication, on July 3)

* EBA paper gives resolution authorities discretion on MREL levels

* MREL disclosure requirements may follow, supervisor say

By Anna Brunetti

LONDON, July 6 (IFR) - The European Banking Authority has in effect left it up to resolution authorities - either the European Central Bank or national regulators - to fine-tune the formula banks will need to adopt to determine how much loss-absorbing capital they need to hold.

The latest proposals regarding the so-called "minimum requirement for own funds and eligible liabilities" (or MREL) rules, were set out on Friday but fell short of detailing exactly how much capital will be required by banks.

The EBA's rules only give resolution authorities general guidance on what elements they should consider when they set out requirements for each local bank, but steer clear of laying out an exact level, or a formula, to calculate MREL.

Overall, each bank will be asked to hold a "default level of liabilities" that can be bailed in, if required - on top of required basic capital and broadly of an equivalent amount.

The EBA's assumption is that, after a troubled bank bails in those additional liabilities to tackle capital shortfalls, it should be able to continue operating with the same level of capital buffers as before.

MREL buffers would thus amount to about double the combined capital levels set out under the current Basel III rules - which include basic cushions as well as systemic, conservation and countercyclical buffers.

"There is a natural link with capital requirements in the process of determining what amount of loss-absorbing capacity banks need to hold on a regular basis," said Mark Adams, policy expert at the EBA.

However, the paper gives resolution authorities the clout to either hike or cut that amount bank by bank.

Some of the combined capital buffers may in fact prove irrelevant in ensuring a bank can absorb losses in a resolution process, the EBA paper says. This means regulators may decide to ditch from the calculation of the MREL requirement specific buffers a bank has been asked to hold, for example against "macro-prudential risks".

DELEGATING A TRICKY TASK The EBA's paper will probably fail to quench bankers' thirst for certainty, as bank executives have sought to pin down the exact amount of capital and debt they will need to raise to meet both EU and international rules.

The industry's focus on these rules escalated in November last year when the Financial Stability Board announced parallel plans to require the most systemically important international banks to hold at least 16%-20% of risk weighted assets as capital.

European banks were left second-guessing how the two sets of rules would interact and which securities within their debt stock would count as loss-absorbing. But the EBA paper provided little enlightenment.

"The final draft standards aim to avoid creating obstacles for those EU resolution authorities with responsibility for G-SIBs and seek to apply MREL in a way that is compatible with the FSB's TLAC proposal," the EBA paper says.

The FSB will publish final recommendations in November and will expect to see them applied on G-SIBs - including 14 European lenders - by January 2019, but MREL rules formally come into force this coming January. That leaves the EU resolution authorities just six months to define the actual MREL requirements.

The EBA said it would be reasonable for the resolution authorities to define categories of banks at a national level - based on business and funding models, risk profile, size and systemic risk - and lay out a calculation "strategy" for each class. Then, each bank would be assigned a precise MREL requirement.

The EBA said it would consider whether to publish additional guidance on MREL requirements' disclosure - as, the EBA says, the FSB is in the process of doing for TLAC. (Reporting By Anna Brunetti, Editing by Chris Spink and Matthew Davies)

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