December 14, 2016 / 3:02 PM / a year ago

UPDATE 1-EBA gives final verdict on European loss absorbing debt

(Adds more details)

By Helene Durand

LONDON, Dec 14 (IFR) - European lenders may have to borrow less 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 banks to 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 region’s 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 subordination to domestic systemically important banks’ debt, but at 13.5% of risk weighted assets and with some flexibility, taking into account the differences in banks’ business models.

“It is very important to improve the resolvability of a bank and to be able to put losses on instruments in resolution,” said Canonne.

“By going beyond the G-SIBs, it is a way to avoid distortion and a potential cliff effect. It is close enough but lower than the G-SIBs’ requirements. Resolution authorities can still impose separate subordination requirements. Ideally, all banks with similar business profiles and resolution strategies should be subject to similar requirements.”

Issues around what instruments can and cannot be safely bailed-in have come to the fore in recent weeks with Banca Monte dei Paschi di Siena.

Italian retail investors hold billions of euros of the bank’s subordinated debt, complicating the rescue of the lender as authorities try to avoid imposing a haircut on these bondholders.


While the EBA’s estimates are lower than previous estimates, the European watchdog was clear that a breach of a bank’s MREL requirements would still have potentially serious consequences.

The watchdog is proposing that banks should not be able to use their common equity Tier 1 towards MREL and capital buffers at the same time, ensuring that MREL requirements are hardwired in the European framework.

“It is crucial that a breach of MREL is treated as seriously as a breach of capital requirements,” it said.

Banks can choose to either stack capital buffers above MREL or treat the buffers as a parallel framework to MREL.

The EBA can allow banks a bit of leeway if they chose the stacking approach, however, and said that a breach of MREL should not necessarily lead to an automatic suspension of voluntary distributions on instruments such as Additional Tier 1 or dividends.

“There could be a situation where a bank cannot roll its MREL debt because of market disruption,” said Canonne. “While this is a breach and this is serious, a bank could be given breathing room for three to six months to return to market and restore its MREL stack.”

Still, the EBA recommends that resolution authorities should be given strengthened powers to respond to a breach of MREL, including the power to require an institution to draw up an MREL restoration plan.

It also suggests that authorities should be given the authority to monitor and manage the maturity of a bank’s MREL stack, along with a redemption approval regime. (Reporting by Helene Durand, Editing by Robert Smith, Alex Chambers and Ian Edmondson)

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