BRUSSELS, August 5, 2015 – Savings and retail banking trade body ESBG this past week called on policymakers to reshape a proposal by Europe’s bank regulator that would set forth criteria aimed at pinning down the minimum requirement for own funds and eligible liabilities (MREL) when “bail-in” occurs.
In a two-page letter
sent on Friday to a dozen policymakers in the European Commission and European Parliament, ESBG noted that the European Banking Authority (EBA) proposed Regulatory Technical Standards for MREL
, sent to the European Commission in early July, could lead to additional costs for banks. The proposed buffer requirements set out in the EBA’s proposal would require banks to raise additional debt that to fully meet the requirement – a costly approach that could have cause banks cost of funding to swell. Deposit-taking banks, which includes savings banks, could see a need to issue new, costly long-term debt.
ESBG also contests EBA's “ex-ante” assumption that after a troubled bank bails-in those additional “buffer” liabilities to tackle capital shortfalls, it should carry on with the same pre-bail-in capital buffer levels. The EBA’s proposed calculation, including buffers, would equate to pre-resolution level double that of all combined capital levels stemming from Basel III (CRR/CRD IV) . This doubling down would be altered only when the resolution authority decides to set a different MREL level , the group contests.
Bail-in and MREL: avoiding taxpayer bail outs
The new banking rescue regime under the EU Bank Recovery and Resolution Directive (BRRD) requires banks to have enough liabilities which could be eligible to bail-in – so-called “Minimum Required Eligible Liabilities (MREL).” This novel concept means that when a bank is unviable, these liabilities will be used to recapitalize the bank and ensure, in turn, that critical bank business stays open. The MREL is politically touchy because it aims to avoid tax-payer bail outs by forcing European authorities to ensure that banks have enough liabilities to absorb losses in case of failure. Among a battery of resolution tools, the bail-in implies that banks’ shareholders and creditors should shoulder much of the burden to help recapitalize a failed bank instead of the taxpayers, with creditor claims written down or converted into equity in case of resolution.
>> See the ESBG webpage on capital requirements