On 9 November 2015, the Financial Stability Board published the Total Loss-Absorbing Capacity (TLAC) Term Sheet (‘the TLAC standard’), which was endorsed by the G20 in November 2015. The objective of the TLAC standard is to ensure that global systemically important banks, referred to as global systemically important institutions (‘G-SIIs’) in the Union framework, have the loss-absorbing and recapitalisation capacity necessary to help ensure that in, and immediately following, a resolution, those institutions can continue to perform critical functions without putting taxpayers' funds, that is public funds or financial stability at risk. In its Communication of 24 November 2015, ‘Towards the completion of the Banking Union’, the Commission committed itself to bringing forward a legislative proposal by the end of 2016 that would enable the TLAC standard to be implemented in Union law by the internationally agreed deadline of 2019.
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The implementation of the TLAC standard in Union law needs to take into account the existing institution-specific minimum requirement for own funds and eligible liabilities (‘MREL’) that applies to all credit institutions and investment firms (institutions) established in the Union, as well as to any other entity as laid down in Directive 2014/59/EU of the European Parliament and of the Council (4) (entities). As the TLAC standard and the MREL pursue the same objective of ensuring that institutions and entities established in the Union have sufficient loss-absorbing and recapitalisation capacity, the two requirements should be complementary elements of a common framework. Operationally, the harmonised minimum level of the TLAC standard for G-SIIs (‘TLAC minimum requirement’) should be introduced in Union legislation through amendments to Regulation (EU) No 575/2013 (5), while the institution-specific add-on for G-SIIs and the institution-specific requirement for non-G-SIIs, referred to as the MREL, should be addressed through targeted amendments to Directive 2014/59/EU and Regulation (EU) No 806/2014 of the European Parliament and of the Council (6).
The provisions of Regulation (EU) No 806/2014, as amended by this Regulation, on the loss-absorbing and recapitalisation capacity of institutions and entities should be applied in a manner consistent with those in Regulation (EU) No 575/2013 and in Directives 2013/36/EU of the European Parliament and of the Council (7) and 2014/59/EU.
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The absence of harmonised rules in the Member States participating in the Single Resolution Mechanism (SRM) in respect of the implementation of the TLAC standard creates additional costs and legal uncertainty and makes the application of the bail-in tool for cross-border institutions and entities more difficult. The absence of harmonised Union rules also results in distortions of competition in the internal market given that the costs for institutions and entities to comply with the existing requirements and the TLAC standard might differ considerably across the Member States participating in the SRM. It is therefore necessary to remove those obstacles to the functioning of the internal market and to avoid distortions of competition resulting from the absence of harmonised rules in respect of the implementation of the TLAC standard. Consequently, the appropriate legal basis for this Regulation is Article 114 of the Treaty on the Functioning of the European Union.
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In line with the TLAC standard, Regulation (EU) No 806/2014 should continue to recognise both the Single Point of Entry (SPE) resolution strategy and the Multiple Point of Entry (MPE) resolution strategy. Under the SPE resolution strategy, only one group entity, usually the parent undertaking, is resolved, whereas other group entities, usually operating subsidiaries, are not put under resolution but transfer their losses and recapitalisation needs to the entity to be resolved. Under the MPE resolution strategy, more than one group entity might be resolved. A clear identification of entities to be resolved (‘resolution entities’), that is the entities to which resolution actions could be applied, together with subsidiaries that belong to them (‘resolution groups’), is important in order to apply the desired resolution strategy effectively. That identification is also relevant for determining the level of application of the rules on loss-absorbing and recapitalisation capacity that institutions and entities should apply. It is therefore necessary to introduce the concepts of ‘resolution entity’ and ‘resolution group’ and to amend Regulation (EU) No 806/2014 as regards group resolution planning, in order to explicitly require the Single Resolution Board (the ‘Board’) to identify the resolution entities and resolution groups within a group and to appropriately consider the implications of any planned action within the group to ensure effective group resolution.
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The Board should ensure that institutions and entities have sufficient loss-absorbing and recapitalisation capacity to ensure a smooth and fast absorption of losses and recapitalisation in the event of resolution, with a minimum impact on taxpayers and financial stability. That should be achieved through compliance by institutions with an institution-specific MREL as set out in Regulation (EU) No 806/2014.
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In order to align denominators that measure the loss-absorbing and recapitalisation capacity of institutions and entities with those provided for in the TLAC standard, the MREL should be expressed as a percentage of the total risk exposure amount and of the total exposure measure of the relevant institution or entity, and institutions or entities should meet simultaneously the levels resulting from the two measurements.
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In order to ensure a level playing field for institutions and entities established in the Union, including on a global level, eligibility criteria for bail-inable liabilities for the MREL should be closely aligned with those laid down in Regulation (EU) No 575/2013 for the TLAC minimum requirement, but subject to the complementary adjustments and requirements introduced in this Regulation. In particular, certain debt instruments with an embedded derivative component, such as certain structured notes, should be eligible, subject to certain conditions, to meet the MREL to the extent that they have a fixed or increasing principal amount repayable at maturity that is known in advance while only an additional return is linked to that derivative component and depends on the performance of a reference asset. In view of those conditions, those debt instruments are expected to be highly loss-absorbing and easy to bail-in in resolution. Where institutions or entities hold own funds in excess of own funds requirements, that fact should not in itself affect decisions concerning the determination of the MREL. Moreover, it should be possible for institutions and entities to meet any part of their MREL with own funds.
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The scope of liabilities used to meet the MREL includes, in principle, all liabilities resulting from claims arising from ordinary unsecured creditors (non-subordinated liabilities) unless they do not meet specific eligibility criteria set out in this Regulation. To enhance the resolvability of institutions and entities through an effective use of the bail-in tool, the Board should be able to require that the MREL is met with own funds and other subordinated liabilities, in particular where there are clear indications that bailed-in creditors are likely to bear losses in resolution that would exceed the losses that they would incur under normal insolvency proceedings. The Board should assess the need to require institutions and entities to meet the MREL with own funds and other subordinated liabilities where the amount of liabilities excluded from the application of the bail-in tool reaches a certain threshold within a class of liabilities that includes MREL eligible liabilities. Institutions and entities should meet the MREL with own funds and other subordinated liabilities to the extent that is necessary to prevent their creditors from incurring losses that are greater than those that creditors would otherwise incur under normal insolvency proceedings.
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Any subordination of debt instruments requested by the Board for the 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 as permitted by the TLAC standard. For resolution entities of G-SIIs, resolution entities of resolution groups with assets above EUR 100 billion (top-tier banks), and for resolution entities of resolution groups with assets below EUR 100 billion that are considered by the national resolution authority as being likely to pose a systemic risk in the event of failure, taking into account the prevalence of deposits and the absence of debt instruments in the funding model, limited access to capital markets for eligible liabilities and reliance on Common Equity Tier 1 capital to meet the MREL, the Board should be able to require that a part of the MREL equal to the level of loss absorption and recapitalisation referred to in Article 27(7) of Regulation (EU) No 806/2014 as amended by this Regulation is met with own funds and other subordinated liabilities, including own funds used to comply with the combined buffer requirement set out in Directive 2013/36/EU.
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At the request of a resolution entity, the Board should be able to reduce the part of the MREL required to be met with own funds and other subordinated liabilities up to a limit that represents the proportion of the reduction possible under Article 72b(3) of Regulation (EU) No 575/2013 in relation to the TLAC minimum requirement laid down in that Regulation. The Board should be able to require, in accordance with the principle of proportionality, that the MREL is met with own funds and other subordinated liabilities to the extent that the overall level of the required subordination in the form of own funds and eligible liabilities items due to the obligation of institutions and entities to comply with the TLAC minimum requirement, the MREL and, where applicable, the combined buffer requirement under Directive 2013/36/EU, does not exceed the greater of the level of loss absorption and recapitalisation referred to in Article 27(7) of Regulation (EU) No 806/2014 as amended by this Regulation or the formula set out in this Regulation based on the prudential requirements under Pillar 1 and Pillar 2 and the combined buffer requirement.
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For specific top-tier banks, the Board should, subject to conditions to be assessed by the Board, limit the level of the minimum subordination requirement to a certain threshold, taking also into account the possible risk of disproportionately impacting the business model of those institutions. That limitation should be without prejudice to the possibility of setting a subordination requirement above this limit through the requirement for subordination under Pillar 2, subject also to the conditions applying to Pillar 2, on the basis of alternative criteria, namely impediments to resolvability, or the feasibility and credibility of the resolution strategy, or the riskiness of the institution.
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The MREL should allow institutions and entities to absorb losses expected in resolution or at the point of non-viability, as appropriate, and to be recapitalised after the implementation of actions provided for in the resolution plan or after the resolution of the resolution group. The Board should, on the basis of the resolution strategy they have chosen, duly justify the imposed level of the MREL and should, without undue delay, review that level to reflect any changes in the level of the requirement referred to in Article 104a of Directive 2013/36/EU. As such, the imposed level of the MREL should be the sum of the amount of the losses expected in resolution that correspond to the institution's or entity's own funds requirements and the recapitalisation amount that allows the institution or entity post-resolution, or after the exercise of write-down or conversion powers, to meet its own funds requirements necessary for being authorised to pursue its activities under the chosen resolution strategy. The Board should adjust downwards or upwards the recapitalisation amounts for any changes resulting from the actions set out in the resolution plan.
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The Board should be able to increase the recapitalisation amount to ensure sufficient market confidence in the institution or entity after the implementation of actions set out in the resolution plan. The requested level of the market confidence buffer should enable the institution or entity to continue to meet the conditions for authorisation for an appropriate period, including by allowing the institution or entity to cover the costs related to the restructuring of its activities following resolution, and to sustain sufficient market confidence. The market confidence buffer should be set by reference to part of the combined buffer requirement under Directive 2013/36/EU. The Board should adjust downwards the level of the market confidence buffer if a lower level is sufficient to ensure sufficient market confidence or should adjust upwards that level where a higher level is necessary to ensure that, following the actions set out in the resolution plan, the entity continues to meet the conditions for its authorisation for an appropriate period, and to sustain sufficient market confidence.
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In line with Commission Delegated Regulation (EU) 2016/1075 (8) the Board should examine the investor base of an individual institution's or entity's MREL instruments. If a significant part of an institution's or entity's MREL instruments is held by retail investors that might not have received an appropriate indication of relevant risks, that could in itself constitute an impediment to resolvability. In addition, if a large part of an institution's or entity's MREL instruments is held by other institutions or entities, the systemic implications of a write-down or conversion could also constitute an impediment to resolvability. Where the Board finds an impediment to resolvability resulting from the size and nature of a certain investor base, it should be able to recommend to an institution or entity that it address that impediment.
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To enhance their resolvability, the Board should be able to impose an institution-specific MREL on G-SIIs in addition to the TLAC minimum requirement set out in Regulation (EU) No 575/2013. That institution-specific MREL should be imposed if the TLAC minimum requirement is not sufficient to absorb losses and to recapitalise a G-SII under the chosen resolution strategy.
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When setting the level of the MREL, the Board should consider the degree of the systemic relevance of an institution or entity and the potential adverse impact of its failure on financial stability. The Board should take into account the need for a level playing field between G-SIIs and other comparable institutions or entities with systemic relevance within the participating Member States. Thus, the MREL of institutions or entities that are not G-SIIs but whose systemic relevance within participating Member States is comparable to the systemic relevance of G-SIIs, should not diverge disproportionately from the level and composition of the MREL generally set for G-SIIs.
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In line with Regulation (EU) No 575/2013, institutions or entities that are identified as resolution entities should be subject to the MREL only at the consolidated resolution group level. That means that resolution entities should, in order to meet their MREL be obliged to issue eligible instruments and items to external third-party creditors that would be bailed-in in the event that the resolution entity enters resolution.
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Institutions or entities that are not resolution entities should comply with the MREL at individual level. The loss-absorption and recapitalisation needs of those institutions or entities should be generally provided by their respective resolution entities through direct or indirect acquisition by those resolution entities of own funds instruments and eligible liabilities instruments issued by those institutions or entities and through their write-down or conversion into instruments of ownership when those institutions or entities are no longer viable. As such, the MREL that applies to institutions or entities that are not resolution entities should be applied together and consistently with the requirements that apply to resolution entities. That should allow the Board to resolve a resolution group without placing certain of its subsidiaries under resolution, thus avoiding potentially disruptive effects on the market. The application of the MREL to institutions or entities that are not resolution entities should comply with the chosen resolution strategy, and in particular should not change the ownership relationship between institutions or entities and their resolution group after those institutions or entities have been recapitalised.
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If both the resolution entity or the parent and its subsidiaries are established in the same Member State and are part of the same resolution group, the Board should be able to waive the application of the MREL that applies to those subsidiaries that are not resolution entities or to permit them to meet the MREL with collateralised guarantees between the parent and its subsidiaries, that can be triggered when the timing conditions equivalent to those allowing the write-down or conversion of eligible liabilities are met. The collateral backing the guarantee should be highly liquid and have minimal market and credit risk.
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Regulation (EU) No 575/2013 provides that competent authorities are able to waive the application of certain solvency and liquidity requirements for credit institutions permanently affiliated to a central body (‘cooperative networks’) where certain specific conditions are met. To take account of the specificities of such cooperative networks, the Board should also be able to waive the application of the MREL that applies to such credit institutions and the central body under similar conditions to those set out in Regulation (EU) No 575/2013 where credit institutions and the central body are established in the same Member State. The Board should also be able to treat credit institutions and the central body as a whole when assessing the conditions for resolution depending on the features of the solidarity mechanism. The Board should be able to ensure compliance with the external MREL requirement of the resolution group as a whole in different ways, depending on the features of the solidarity mechanism of each group, by counting eligible liabilities of entities that, in accordance with the resolution plan, are required by the Board to issue instruments eligible for the MREL outside the resolution group.
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Competent authorities, national resolution authorities and the Board should appropriately address and remedy any breaches of the TLAC minimum requirement and of the MREL. Given that a breach of those requirements could constitute an impediment to institution or group resolvability, the existing procedures to remove impediments to resolvability should be shortened, in order to address any breaches of the requirements expediently. The Board should also be able to require institutions or entities to modify the maturity profiles of eligible instruments and items and to prepare and implement plans to restore the level of those requirements. The Board should also be able to prohibit certain distributions where it considers that an institution or entity is failing to meet the combined buffer requirement under Directive 2013/36/EU when considered in addition to the MREL.
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This Regulation 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.
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Since the objective of this Regulation, namely to lay down uniform rules for the purposes of the Union recovery and resolution framework for institutions and entities, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale of the action, be better achieved at Union level, the Union may adopt this Regulation, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective.
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To allow for an appropriate time for the application of this Regulation, this Regulation should be applied from 28 December 2020,
