Explanatory Memorandum to COM(2016)851 - Amendment of Regulation (EU) No 806/2014 as regards loss-absorbing and Recapitalisation Capacity for credit institutions and investment firms - Main contents
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| dossier | COM(2016)851 - Amendment of Regulation (EU) No 806/2014 as regards loss-absorbing and Recapitalisation Capacity for credit institutions and ... |
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| source | COM(2016)851  |
| date | 23-11-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The proposed amendments to Regulation (EU) 806/2014 (the Single Resolution Mechanism Regulation or SRMR) are part of a legislative package that includes also amendments to Regulation (EU) No 575/2013 (the Capital Requirements Regulation or CRR), to Directive 2013/36/EU (the Capital Requirements Directive or CRD) and to Directive 2014/59/EU (the Bank Recovery and Resolution Directive or BRRD).
Over the past years the EU implemented a substantial reform of the financial services regulatory framework to enhance the resilience of financial institutions in the EU, largely based on global standards agreed with the EU’s international partners. In particular, the reform package included Regulation (EU) No 575/2013 (the Capital Requirements Regulation or CRR) and Directive 2013/36/EU (the Capital Requirements Directive or CRD), on prudential requirements for and supervision of institutions, Directive 2014/59/EU (the Bank Recovery and Resolution Directive or BRRD), on recovery and resolution of institutions and Regulation (EU) No 806/2014 on the Single Resolution Mechanism (SRM).
These measures were taken in response to the financial crisis that unfolded in 2007-2008.The absence of adequate crisis management and resolution frameworks forced governments around the world to rescue banks following the financial crisis. The subsequent impact on public finances as well as the undesirable incentive of socialising the costs of bank failure have underscored that a different approach is needed to manage bank crises and protect financial stability.
Within the Union and in line with the significant steps that have been agreed and taken at international level, Directive 2014/59/EU (Bank Recovery and Resolution Directive (BRRD) 1 and Regulation (EU) No 806/2014 (Single Resolution Mechanism Regulation (SRMR) 2 have established a robust bank resolution framework to effectively manage bank crises and reduce their negative impact on financial stability and public finances. A cornerstone of the new resolution framework is the “bail-in” which consists of writing down debt or converting debt claims or other liabilities into equity according to a pre-defined hierarchy. The tool can be used to absorb losses of and internally recapitalise an institution that is failing or likely to fail, so that its viability is restored. Therefore, shareholders and other creditors will have to bear the burden of an institution's failure instead of taxpayers. In contrast to other jurisdictions, the Union bank recovery and resolution framework has already mandated resolution authorities to set for each credit institution or investment firm ('institution') a minimum requirement for own funds and eligible liabilities (MREL), which consist of highly bail-inable liabilities to be used to absorb losses and recapitalise institutions in case of failures. The delegated legislation concerning the practical implementation of this requirement has been adopted recently by the Commission 3 .
At the global level, the Financial Stability Board (FSB) has published on 9 November 2015 the Total Loss-absorbing Capacity (TLAC) Term Sheet ('the TLAC standard') that was adopted a week later at the G20 summit in Turkey 4 . The TLAC standard requires global systemically important banks (G-SIBs), referred to as global systemically important institutions (G-SIIs) in the Union legislation, to hold a sufficient amount of highly loss absorbing (bail-inable) liabilities to ensure smooth and fast absorption of losses and recapitalisation in resolution. In its Communication of 24 November 2015 5 , the Commission committed to bring forward a legislative proposal by the end of this year so that the TLAC standard can be implemented by the agreed deadline of 2019. In addition, the Commission committed to review the existing MREL rules with the view to provide full consistency with the internationally agreed TLAC standard by considering the findings of a report that the European Banking Authority (EBA) is required to provide to the Commission under Article 45(19) of the BRRD. An interim version of that report has already been published by the EBA on 19 July 2016 6 and the final report is expected to be submitted in the course of December 2016.
While the general BRRD and SRMR frameworks remain valid and sound, the main objective of this proposal is to implement the TLAC standard and to integrate the TLAC requirement into the general MREL rules by avoiding duplication by applying two parallel requirements. Although TLAC and MREL pursue the same regulatory objective, there are, nevertheless, some differences between them in the way they are constructed. The scope of application of MREL covers not only G-SIIs, but the entire Union banking industry. Differently from the TLAC standard, which contains a harmonised minimum level, the level of MREL is determined by resolution authorities on the basis of a case-by-case institution specific assessment. Finally, the minimum TLAC requirement should be met in principle with subordinated debt instruments, while for the purposes of MREL, subordination of debt instruments could be required by resolution authorities on a case-by-case basis to the extent it is needed to ensure that in a given case bailed in creditors are not treated worse than in a hypothetical insolvency scenario (which is a scenario that is counterfactual to resolution). In order to achieve a simple and transparent framework providing legal certainty and consistency, the Commission is proposing to integrate the TLAC standard into the existing MREL rules and ensure that both requirements are met with largely similar instruments. This approach requires introducing limited adjustments to the existing MREL rules ensuring technical consistency with the structure of any future requirements for G-SIIs.
In particular, further appropriate technical amendments to the existing rules on MREL are needed to align them with the TLAC standard as regards inter alia the denominators used for measuring loss-absorbing capacity, the interaction with capital buffer requirements, disclosure of risks to investors and their application in relation to different resolution strategies. While implementing the TLAC standard for G-SIIs, the Commission's approach will not materially affect the burden of institutions which are not G-SIIs to comply with the provisions on MREL.
Operationally, the harmonised minimum level of the TLAC standard will be introduced in the Union through amendments to the Capital Requirements Regulation and Directive (CRR and CRD) 7 while the institution-specific add-on for G-SIIs and the institution specific MREL for non-G-SIIs will be dealt with through targeted amendments to the BRRD and SRMR. As such, this proposal is part of a wider review package of the Union financial legislation aiming at reducing risks in the financial sector (CRR/CRD review) and making it more resilient.
This proposal covers specifically the targeted amendments to the SRMR related to the implementation of the TLAC standard in the Union. This proposal will apply to the Single Resolution Board (SRB) and national authorities of the Member States participating in the Single Resolution Mechanism (SRM) when they set and implement the requirements on loss absorbing and recapitalisation capacity of financial firms established in the Banking Union.
• Consistency with existing policy provisions in the policy area
The existing Union bank resolution framework already requires all European banks to hold a sufficient amount of highly loss absorbing (bail-inable) liabilities. By aligning the existing requirement for G-SIIs with the global TLAC standard, the proposal will improve and facilitate the application of the existing rules. The proposal is, therefore, consistent with the overall objective of the Union bank resolution framework to reduce taxpayers' support in bank resolution. This proposal is fully consistent with the proposal of the Commission to amend the BRRD as regards the rules on loss absorbing and recapitalisation of banks applicable in the entire Union.
• Consistency with other Union policies
The proposal is part of a wider review of the Union financial legislation aiming at reducing risks in the financial sector while promoting sustainable financing of the economic activity. It is fully consistent with the EU's fundamental goals of promoting financial stability, reducing taxpayers' support in bank resolution as well as contributing to a sustainable financing of the economy.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The proposed Regulation amends an existing Regulation, the SRMR. The legal basis for the proposal is the same as the legal basis of the SRMR, which is Article 114 of the TFEU. That provision allows the adoption of measures for the approximation of national provisions which have as their object the establishment and functioning of the internal market.
The proposal harmonises national laws of Member States participating in the SRM on recovery and resolution of credit institutions and investment firms, in particular as regards their loss-absorbing and recapitalisation capacity in resolution, to the extent necessary to ensure that the SRB and national resolution authorities of participating Member States and banks established in the Banking Union have the same tools and capacity to address bank failures in line with the agreed international standards (TLAC standard).
By establishing harmonised requirements for banks in the Member States participating in the SRM, the proposal reduces considerably the risk of divergent national rules in those Member States on loss-absorbing and recapitalisation capacity in resolution, which could distort competition in the internal market. The proposal has, therefore, as its object the establishment and functioning of the internal market.
Article 114 of the TFEU is, therefore, the appropriate legal base.
• Subsidiarity
Under the principle of subsidiarity set out in Article 5.3 of the TEU, in areas which do not fall within its exclusive competence, the Union should act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.
The Union and its Member States, in particular the Member States participating in the SRM, are committed to implement international standards. In the absence of any Union action, Member States would have needed to implement themselves the global TLAC standard in their own jurisdictions without the possibility of amending the existing framework that stem from the BRRD and SRMR. As a result, in view of important differences between the TLAC standard and existing framework as well as possibly diverging interpretations of the TLAC term sheet by the national regulators, banks, in particular G-SIIs, would have been subject to two parallel requirements (with the TLAC requirement itself being applied differently from one Member State to another), which would imply additional costs for both banks and public authorities (supervision and resolution authorities). Union action is, therefore, desirable to implement in a harmonised way the global TLAC standard in the Member States participating in the SRM and to align the existing framework with that standard in order to alleviate as much as possible the compliance costs of banks and public authorities while ensuring an effective resolution in case of bank failures.
• Proportionality
Under the principle of proportionality, the content and form of Union action should not exceed what is necessary to achieve its objectives, consistent with the overall objectives of the Treaties.
While implementing TLAC for global G-SIIs, the proposal would not materially affect the burden of banks to comply with the existing rules on loss absorbing and recapitalisation capacity since the proposal does not extend the application of the TLAC minimum level beyond G-SIIs. In addition, the proposal limits to a large extent the costs of banks, in particular G-SIIs, for compliance with the TLAC standard by aligning the existing rules to the extent possible with that standard. Finally, the proposal does not extend the application of the TLAC minimum level beyond G-SIIs. On the contrary, for non-GSIIs, the proposal maintains the existing overall principle that the quality and level of the requirement on loss-absorbing and recapitalisation should be tailored by resolution authorities for each specific bank based on its risk, size, interconnectedness and the chosen resolution strategy. As regards G-SIIs that are subject to the TLAC minimum level, before requiring any institution specific add-on, the proposal demands the SRB and national resolution authorities to assess whether any such add-on is necessary, proportionate and justified. The provisions of the proposal are, therefore, proportionate to what is necessary to achieve its objectives.
3. RESULTS OF IMPACT ASSESSMENTS
• Impact assessment
Being part of a wider review package of the Union financial legislation aiming at reducing risks in the financial sector (CRR/CRD review), the proposal has been subject to an extensive impact assessment. The draft impact assessment report was submitted on 7 September 2016 to the Commission's Regulatory Scrutiny Board 8 . The Board issued a negative opinion on [date]. After strengthening the evidence base for certain elements of the review package, the Board issued a positive opinion on 27 September 2016.
In line with its 'Better Regulation' policy, the Commission conducted an impact assessment of several policy alternatives. Policy options were assessed against the key objectives of enhancing loss absorbing and recapitalisation capacity of banks in resolution and legal certainty and coherence of the resolution framework. The assessment was done by considering the effectiveness of achieving the objectives above and the cost efficiency of implementing different policy options.
As regards the implementation of the TLAC standard in the Union, three policy options have been considered in the impact assessment. Under the first option, the BRRD and SRMR would continue to apply in its current form. Under the second option, the TLAC standard for G-SIIs would be integrated in the existing resolution framework, while that framework would be amended as appropriate to ensure full compatibility with the TLAC standard. The third policy option proposed to extend, additionally, the scope of the TLAC minimum level to other systemically important institutions in the Union (O-SIIs) than G-SIIs. The impact assessment concluded that the second policy option achieves the relevant policy objectives the best. In particular, contrary to the first option, it provides a harmonized implementation of the TLAC standard for all Union G-SIIs by reducing their costs of complying with potentially two different requirements (the TLAC standard and the existing BRRD and SRMR) while providing for a consistent interpretation of the TLAC term sheet in the EU. This option will increase the resolvability of G-SIIs in the Union and prevent contagion effects stemming from G-SIIs cross-holdings through specific rules of the TLAC standard that are not currently provided in the BRRD and the SRMR (i.e. TLAC minimum level in the form of subordinated debt instruments, deduction of cross-holdings of TLAC eligible instruments held by G-SIIs). This option will ensure that the TLAC standard is implemented in the Union, which would reinforce the expectation on other jurisdictions to do the same with the view of strengthening the resolvability of G-SIBs worldwide. On the other hand, this policy option is preferable to the third option because it will not have the disadvantage of extending the minimum TLAC level to banks other than G-SIIs (O-SIIs), for which that level of minimum TLAC requirement may not appear to be well calibrated in view of their high diversity in terms of size, business model, interconnectedness and systemic importance.
• Fundamental rights
This proposal complies with the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union, notably the rights to property and the freedom to conduct a business, and has to be applied in accordance with those rights and principles. In particular, this Regulation ensures that interference with property rights of bank creditors should not be disproportionate. Affected creditors should not incur greater losses than those which they would have incurred if the institution had been wound up under normal insolvency proceedings at the time that the resolution decision is taken.
4. BUDGETARY IMPLICATIONS
The proposal does not have implications for the Union budget.
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
As explained above, the amendments to the CRR, which is part of the same legislative package will include the rules on the TLAC minimum requirement for G-SIIs while this proposal deals with the institution specific add-on for G-SIIs and the general requirements applicable to banks established in the Banking Union. This proposal introduces a number of targeted amendments to the existing SRMR.
Contents
The TLAC standard and the BRRD with SRMR recognise both Single Point of Entry (SPE) and Multiple Point of Entry (MPE) resolution strategies. Under the SPE strategy, only one group entity (usually the parent) is resolved whereas other group entities (usually operating subsidiaries) are not put in resolution, but upstream their losses to the entity to be resolved. Under the MPE strategy, more than one entity may be resolved. A clear identification of entities to be resolved ('resolution entities') and subsidiaries that belong to them ('resolution groups') is important to apply effectively the desired resolution strategy. Moreover, this identification is also relevant for determining the level of application of the rules on loss absorbing and recapitalisation capacity that financial firms should comply with. For this reason, amendments to Article 3 of the SRMR introduce the concepts of resolution entity and resolution group. Amendments to Articles 8 and 9 concerning group resolution planning explicitly require the Board to identify the resolution entities and resolution groups within a financial group and consider appropriately the implications of any planned resolution action within the group to ensure an effective group resolution.
Article 12 is repealed and replaced with the following new provisions: Articles 12, 12a, 12b, 12c, 12d, 12e, 12f, 12g, 12h, 12i and 12j.
Article 12 determines the institutional framework as regards the application of the minimum requirement for own funds and eligible liabilities by underlining the respective roles of the SRB, national resolution and competent authorities of the participating Member States.
Currently, the institution specific minimum requirement for own funds and eligible liabilities ('the MREL') is measured as a percentage of the total liabilities of the institution. The amended Article 12a aligns the measurement metrics of the MREL with those of the minimum harmonised requirement for G-SIIs as provided in the TLAC standard ('the TLAC minimum requirement'). The institution specific requirement should, therefore, be expressed as a percentage of the total risk exposure amount and of the leverage ratio exposure measure of the relevant institution.
Article 12b keeps the existing exemption from the MREL for mortgage credit institutions under the condition that national insolvency or similar procedures allow for an effective loss absorption by creditors that meets the resolution objectives. It also clarifies that institutions that are exempted from the MREL should not be part of the overall consolidated requirement at the level of the resolution group.
Article 12c specifies the eligibility criteria for the instruments and items that could count for meeting the MREL by aligning them closely with the eligibility criteria provided in the TLAC standard for the TLAC minimum requirement. These criteria are, therefore, identical with the exception of the following.
As regards the scope of the instruments covered, certain instruments with derivative features, such as structured notes, are eligible for meeting the MREL because they could be sufficiently loss absorbing in resolution. Structured notes are debt obligations with an embedded derivative component. Their return is adjusted to the performance of reference assets such as single equity, equity indices, funds, interest rates, commodities or currencies. Article 12c clarifies that structured notes are eligible for the MREL to the extent that they have a fixed principal amount repayable at maturity while only an additional return is linked to a derivative and depends on the performance of a reference asset. The rationale for this is that the fixed principal amount is known in advance at the time of the issuance, its value is stable throughout the lifecycle of the structured note and could be easily bailed-in in resolution.
Under the TLAC standard, the TLAC minimum requirement should be met using largely subordinated debt instruments that rank in insolvency below senior liabilities explicitly excluded from the minimum TLAC requirement, such as covered deposits, derivatives, tax or other public law related liabilities. To meet the institution specific MREL, subordination of eligible debt instruments could currently be required by resolution authorities on a case-by-case basis. The new provisions of Article 12c further specify that subordination could be required to the extent that it is needed to facilitate the application of the bail-in tool, in particular when there are clear indications that bailed-in creditors are likely to bear losses in resolution that would exceed their potential losses in insolvency and only to the extent necessary to cover the portion of the losses above likely insolvency losses. Any subordination requested by Board for the institution specific MREL should be without prejudice to the possibility to partly meet the TLAC minimum requirement with non-subordinated debt instruments in accordance with Regulation (EU) No 575/2013 and in line with the TLAC standard.
Article 12d specifies the conditions for determining the MREL for all entities by the Board. The requirement should allow banks to absorb losses expected in resolution and recapitalise the bank post-resolution. The Board shall duly justify the level of the MREL imposed based on the chosen resolution strategy. As such, that level should not exceed the sum of the amount of losses expected in resolution that correspond to the institutions' own funds requirements and the recapitalisation amount that allows the entity post-resolution to meet its own funds requirements necessary for being authorised to pursue its activities under the chosen resolution strategy. The MREL should be expressed as a percentage of the total risk exposure and leverage ratio measures, and institutions should meet the level resulting from the two measurements.
As regards G-SIIs, Article 12e specify that an institution specific add-on to the TLAC minimum level as provided in the TLAC standard could be imposed only where that minimum is not sufficient to absorb losses and recapitalise a G-SII under the chosen resolution strategy. The Board's decision to impose such an add-on should be duly justified.
As in the proposal amending the CRD, this proposal introduces in Article 12f the concept of guidance. This allows the Board to require institutions to meet higher levels of MREL while addressing in a more flexible manner any breaches of those levels, in particular by alleviating the automatic effects of such breaches in the form of limitations to the Maximum Distributable Amounts (MDAs). In particular, Article 12f allows the Board to require institutions to meet additional amounts to cover losses in resolution that are higher than those expected under a standard resolution scenario (i.e. above the level of the existing own funds requirements) and ensure a sufficient market confidence in the entity post-resolution (i.e. on top of the required recapitalisation amount). Article 12f specifies, nevertheless, that for the loss absorption part of the MREL, the level of the guidance should not exceed the level of the capital guidance when such guidance is requested by supervisory authorities under supervisory stress testing to cater for losses above normal requirements. For the recapitalisation part, the level of the guidance to ensure market confidence should allow institutions post-resolution to meet their authorisation requirement for an appropriate period of time. This market confidence buffer should not exceed the combined capital buffer requirement under Directive 2013/36/EU unless a higher level is necessary to ensure that that, following the event of resolution, the entity continues to meet the conditions for its authorisation for an appropriate period
Articles 12g and 12h deal with the level of application of the MREL. As regards institutions that qualify as resolution entities, the MREL applies to them at the consolidated resolution group level only. This means that resolution entities will be obliged to issue eligible (debt) instruments to external third party creditors that would be bailed-in should the resolution entity (i.e. resolution group) enter resolution. As regards other entities of the group, the proposal introduces the concept of an internal MREL in line with a similar concept brought forward by the TLAC standard. This means that other resolution group entities which themselves are not resolution entities should issue eligible (debt) instruments internally within the resolution group, i.e. such instruments should be bought by resolution entities. Where a resolution group entity which itself is not a resolution entity reaches the point of non-viability, such instruments are written down or converted into equity and losses of that entity are then up-streamed to the resolution entity. The main advantage of the internal MREL is that it allows recapitalising a resolution group entity (with critical functions) without placing it into formal resolution, which could potentially have disruptive effects on the market. The application of this requirement should nevertheless comply with the chosen resolution strategy, in particular, it should not change the ownership relationship between the entity and its resolution group after its recapitalisation. The proposal also specifies that, under certain safeguards, the internal MREL could be replaced with collateralised guarantees between the resolution entity and other resolution group entities that could be triggered under the equivalent timing conditions that the instruments eligible for the internal MREL. The proposed safeguards include, in particular, the agreement of the relevant resolution authorities to replace the internal MREL and collateralisation of the guarantee given by resolution entity to its subsidiary with highly liquid collateral with minimal credit and market risk.
Article 12i specifies that, under certain safeguards, the internal MREL of a subsidiary could be waived by the Board if both the subsidiary and its parent resolution entity are established in the same participating Member State.
Amendments in Article 12g deal with the breaches of the MREL. Article 12g lists the powers available to resolution authorities in the event of breaches of the MREL. Since a breach of the requirement could constitute an impediment to institution or group resolvability, amendments to Article 10 shorten the existing procedure to remove impediments to resolvability to address expediently any breaches of the requirement. They also introduce new powers for Board to require modifications in the maturity profiles of eligible instruments and plans from institutions to restore the level of the MREL.
Amendments to Article 16, 18, 20 and 21 ensure that instruments eligible for the internal MREL other than capital instruments (e.g. debt instruments) could also be written down or converted into equity by the Board where the resolution group entity which itself is not a resolution entity that issues them reaches the point of non-viability.