Banking Recovery and Resolution Matters - Newsletter 2

Guidelines for common procedures and methodologies for the SREP and supervisory stress testing

On 18 March 2022, the European Banking Authority (EBA) published the revised final Guidelines for common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing.

These SREP guidelines will be applied in the supervision of all institutions across the Union and represent a major step forward in forging a consistent supervisory culture across the single market. These Guidelines provide a common framework for the work of supervisors in their assessment of risks to banks’ business models’, their solvency and liquidity as well as the conduct of supervisory stress testing.

These updated guidelines apply from 1 January 2023.

A link to the guidance may be accessed through this link.

Consultation on State aid rules for banks in difficulty - evaluation

On 17 March 2022, the European Commission (EC) launched a targeted and public consultation on state aid rules applicable for banks which are in difficulty.

Specific State aid rules for banks in difficulty have applied since 2008. This initiative aims to evaluate to what extent they have fulfilled their objective of preserving financial stability while minimising competition distortions stemming from the granting of State aid.

A public consultation, a targeted consultation and a study will feed into the evaluation, which will focus on the effectiveness, efficiency, relevance, coherence and European Union (EU) added value of these specific rules.

This input will help the Commission to analyse the extent to which the Commission’s State aid rules for banks in difficulty preserved financial stability, while minimising competition distortions.

Feedback for both consultations may be submitted through the below links:

• Targeted consultation; and
• Public consultation.

Both consultations shall run till 09 June 2022.

SRB’s Operational Guidance on the identification and mobilisation of collateral in resolution

On 17 March 2022, the Single Resolution Board (SRB) has published its Operational guidance on the identification and mobilisation of collateral in resolution. It is aimed at banks’ capacity to identify and mobilise certain asset classes that could be used as collateral during resolution in a timely way to support financial continuity.

As stated in the 2022 SRB Work Programme, liquidity and funding in resolution is one of the three common priorities for the 2022 Resolution Planning Cycle (RPC). This operational guidance complements the SRB’s Expectations for Banks (EfB) document that sets out the capabilities the SRB expects banks to demonstrate to show that they are resolvable, in providing banks with additional guidance on the identification and mobilisation of collateral during and after resolution.

The guidance is structured around three objectives:

1. ensuring that banks’ collateral governance and management is able to support the resolution scheme and contribute to the financial continuity of the group
2. ensuring that banks have capacity to identify collateral, including its amount, location, governing law, currency and overall availability
3. assessing banks’ capacity to mobilise collateral, and in particular non-marketable assets and assets not eligible for ordinary CB funding

It provides a clear understanding of the operational and legal requirements that banks need to anticipate in order to maximise the amount of assets that could be mobilised as collateral in and after resolution. This concept allows the SRB to access the necessary information and analysis from banks to make full use of resolution tools should a bank get into difficulty, and to ensure financial stability of banks in resolution.

A link to the guidance may be accessed through this link.

Update: SRB approach to CRR discretion on leverage and MREL calibration

As announced by the SRB in December 2021, the decision to temporarily exclude certain exposures to central banks from the calculation of an institution’s total exposure measure (that is, leverage amount), under the Capital Requirements Regulation (CRR) might affect the calibration of the final minimum requirements for own funds and eligible liabilities (MREL) targets applicable from 1 January 2024.

In September 2020, the European Central Bank (ECB) had used this temporary measure because of the Covid-19 pandemic. On 10 February 2022, the ECB noted that the relief measure will not be extended after the end of March 2022.

Final MREL targets will be re-calibrated in the 2022 resolution planning cycle based on the leverage amount, including the central bank exposures temporarily excluded on the basis of the relief measure, to ensure adjustment of the MREL before the compliance date of 1 January 2024.

In the meantime, the SRB will compute, where relevant, notional final MREL targets based on institutions’ leverage amount including the central bank exposures. The SRB will communicate these notional targets to institutions affected by the relief measure in the context of the 2021 resolution planning cycle and will use them to monitor the institutions’ build-up of MREL resources towards the final MREL targets.

Information may be accessed through this link.

CIR (EU) 2022/365 of 3 March 2022 amending Implementing Regulation (EU) 2018/1624 laying down implementing technical standards with regard to procedures and standard forms and templates for the provision of information for the purposes of resolution plans for credit institutions and investment firms pursuant to Directive 2014/59/EU of the European Parliament and of the Council

On 04 March 2022, the Official Journal of the EU published the Commission Implementing Regulation (EU) 2022/365 of 3 March 2022 amending Implementing Regulation (EU) 2018/1624 laying down implementing technical standards with regard to procedures and standard forms and templates for the provision of information for the purposes of resolution plans for credit institutions and investment firms pursuant to the Bank Recovery and Resolution Directive (BRRD).

Directive (EU) 2019/879 of the European Parliament and of the Council (BRRD 2) introduced certain amendments to the minimum requirement for own funds and eligible liabilities laid down in Directive 2014/59/EU. Information on institutions’ capacity to meet this requirement is, to a limited extent, also considered in the context of resolution planning. Due to this, the Commission Implementing Regulation (EU) 2018/1624 had to be amended accordingly. This Regulation is based on the draft implementing technical standards (ITSs) submitted to the Commission by the European Banking Authority (EBA).

Link to the Commission Implementation Regulation may be accessed through this link.

Old risks, new challenges, same objective: the work programme of the Basel Committee in 2022

On 25 February 2022, Mr Pablo Hernández de Cos, Chair of the Basel Committee on Banking Supervision (BCBS) and Governor of the Bank of Spain, delivered a keynote speech on the BCBS 2022 Work Programme, at the Eurofi High-Level Seminar 2022.

During this speech, Mr Pablo Hernández de Cos pointed out that the Committee has four thematic areas of focus for 2022:

1. COVID-19 resilience and recovery;
2. Horizon scanning of emerging risks and structural trends;
3. The strengthening of supervisory coordination and practices; and
4. Basel III implementation.

Full keynote speech may be accessed through this link.

SRB issues the MREL dashboards for Q3 2021

On 01 February 2022, the SRB issued the MREL dashboards for Quarter 3 of 2021.

The MREL dashboards are based on bank data reported to the SRB and cover entities under SRB’s remit. The first section of the dashboard focuses on the evolution of MREL targets for resolution entities and non-resolution entities, outstanding stock and shortfalls in Q2.2021 under the BRRD II framework. It also includes an overview of gross issuances of MREL instruments during the last quarter. The second section highlights recent developments in the cost of funding.

The main data issued under this MREL dashboards include the following:

MREL monitoring Q3.2021

1. MREL final targets for resolution entities
2. MREL outstanding stock of resolution entities
3. Shortfalls against final targets (2024) of resolution entities
4. MREL binding intermediate targets and shortfalls (2022) of resolution entities
5. MREL targets and shortfalls of non-resolution entities
6. MREL gross issuances

Cost of funding and market access

1. Cost of Funding
2. Gross Issuance

Key findings are included hereunder:

• In percentage of the total risk exposure amount (TREA), the average MREL final target including the combined buffer requirement (CBR) for resolution entities, to be respected by 1 January 2024, stood at 26.06% TREA, almost stable over the quarter.
• The average MREL shortfall to the final 2024 targets including the CBR reached 0.48% TREA (or EUR 34.6 bn) for resolution entities, reducing significantly from Q2.2021, where it stood at 0.56% TREA (or EUR 40.1 bn) and resulting in the lowest level of the shortfall since Q4.2019.
• For non-resolution entities, the average MREL shortfall (including the CBR) against the final target reduced with respect to Q2.2021 and amounted to 2.11% TREA (or EUR 42.4 bn).
• Banks were aiming to close their shortfall to the intermediate MREL targets to be respected by 1 January 2022. Indeed, most resolution entities with a shortfall in Q2.2021 either fully closed or reduced it over the quarter.
• The average shortfall against the MREL binding intermediate target including the CBR was limited to 0.07% TREA (or EUR 4.9 bn) for resolution entities and 0.54% TREA (or EUR 10.9 bn) for non-resolution entities. Almost all banks were expected to respect the binding intermediate target at year end.
• Due to seasonally low market activity over the first half of Q3, issuances’ volume decreased by 38.2% over the quarter and amounted to EUR 42.9 bn (or 0.6% TREA).  
• Funding costs marginally deteriorated, staying slightly above their pre-pandemic levels during the last quarter of 2021.

The press release and the MREL dashboards may be accessed through this link.

EBA publishes guidelines for institutions and resolution authorities on improving banks’ resolvability (EBA/GL/2022/01) and consults on transferability

Guidelines

On 13 January 2022, EBA published its final Guidelines for institutions and resolution authorities on improving banks’ resolvability (the Resolvability Guidelines). These Guidelines represent a significant step in complementing the EU legal framework in the field of resolution based on international standards and leveraging on EU best practices.

The Resolvability Guidelines, taking stock of the best practices developed so far by EU resolution authorities on resolvability topics, set-out requirements to improve resolvability in the areas of operational continuity in resolution, access to financial market infrastructure, funding and liquidity in resolution, bail-in execution, business reorganisation and communication.

These Guidelines are addressed to both authorities and institutions in the EU so as to ensure consistent progress on resolvability for all institutions and facilitate resolvability work for cross-border groups and its monitoring in resolution colleges.

Institutions and authorities should comply with these Guidelines in full by 1 January 2024. Complying with the Guidelines will not necessarily equate with being resolvable as this remains for the relevant resolution authority(ies) to determine. Rather, these Guidelines should be seen as the minimum steps that institutions should take towards resolvability.

Consultation

The EBA also launched, on 13 January 2022, its consultation paper on Guidelines for institutions and resolution authorities on transferability of parts of or a whole bank in the context of resolution to complement the resolvability assessment for transfer strategies. In particular, the Guidelines specify separability in the context of the application of transfer tools. The consultation closed on 15 April 2022.

The draft transferability Guidelines aim at assessing the feasibility and credibility of transfer strategies and encompass requirements relating to the implementation of transfer tools when considered as the preferred or alternative strategies for institutions.

The resolvability and transferability Guidelines will be updated and complemented as progress is achieved on relevant policy topics, both at international and EU level. In particular, the EBA is working on guidelines on the topics of bail-in disclosure, resolution disclosure and resolvability testing.

Links for the final and draft guidance may be accessed through the links provided hereunder:

1. Final resolvability guidelines; and
2. Draft transferability guidelines.