SRB publishes Report on the Resolvability of Banking Union Banks: 2022

On 19th September, the Single Resolutions Board (SRB) published a Report on the second assessment of banks’ resolvability across the Banking Union. The 2022 Resolvability Assessment shows that banks under the SRB’s remit continue to make steady progress in building up their resolvability capabilities:

Despite adverse market conditions and rising geopolitical tensions, banks have maintained their momentum in building up their minimum requirement for own funds and eligible liabilities (MREL) capacity with two thirds of bank having reached their final MREL target for 2024 including the Combined Buffer Requirement (CBR). Additionally, banks have also taken steps to improve their preparedness to operationalise bail-in. In the meantime, the SRB has increased its expectations in line with the timeline for the implementation of the Expectations for Banks. Three capabilities related to liquidity in resolution, separability and Management Information Systems (MIS) were introduced.

In 2023, banks are expected to work on closing the main remaining gaps to support resolvability. This means that banks need to meet their final MREL target and demonstrate that they have covered any outstanding material gaps.

As the transition period set by the SRB for implementing the Banking Package and the resolvability capabilities set out in the Expectations for Banks is coming to an end, the focus will increasingly shift to a regular and holistic testing of banks’ resolvability capabilities. Regular testing of banks’ resolvability capabilities is needed to verify that they work effectively and/or to identify any areas where further work may be warranted to be able to act swiftly in a crisis setting. Recent crises in the US and Switzerland have shown that banks and resolution authorities have to increase their level of preparedness to deal with rapidly unfolding crises.

The SRB aims to increase its engagement with banks on the operationalisation of resolution strategies, the approach to resolvability testing and with consultation documents on policy guidance.

This Assessment report may be accessed through this link. 

Liquidity in resolution: a missing piece in the framework

Speaking to the Eurofi Magazine, SRB Chair Dominique Laboureix stressed the importance liquidity and how central it is to successful crises management.

Banks depend on trust. If customers lack confidence that their funds will be available on demand, a spiraling liquidity crisis may develop. Such a crisis can potentially drive fire sales of assets to meet increasing liquidity demands, hampering the viability of the bank, the feasibility of resolution and possibly spreading panic across the banking sector and beyond.

Without adequate liquidity support, the failure of a bank may become a self-fulfilling prophecy as market actors seek to ensure that they will not be left in a bank run. This is why in recent cases, the liquidity provisions have been of a dramatic scale relative to the size of the failing entity’s balance sheet.

Importantly, developing an effective liquidity in resolution facility should also support the bank’s return to market funding by restoring confidence in its finances and business.

Liquidity can come from several authorities in the Banking Union. The SRB has now built up the Single Resolution Fund, which stands at almost EUR 80 billion, and its firepower could almost double if the revised European Stability Mechanism Treaty is ratified.

Dominique Laboureix stated that the SRB’s resolution toolkit is strong but must be backed by effective liquidity provisions.

The Euofi Magazine can be accessed through the following link.

SRB publishes MREL dashboard for Q1 2023

On 3rd August 2023 the SRB published its MREL dashboard report for the 1st quarter of 2023. The MREL dashboard presents the evolution of MREL targets and shortfalls for resolution (external MREL) and non-resolution entities (internal MREL) as well as the level and composition of resources of resolution entities in that quarter. In addition, it highlights recent developments in the cost of funding and provides an overview of gross issuances of MREL-eligible instruments in the first months of 2023.

The SRB’s key findings were as follows:

• Banks continued to make progress in building up their levels of MREL, with, on average, increased reliance on senior debt for meeting their targets.
• For resolution entities, the average MREL final target including the Combined Buffer Requirement (CBR) was equal to 27.2% of the Total Risk Exposure Amount (TREA), increasing slightly with respect to the previous quarter.
• In aggregate terms, the total MREL shortfall (including the CBR) against final targets of both resolution and non-resolution entities continued to decrease, albeit at a slower pace compared to Q4.2022, respectively amounting to EUR 20.5 bn and EUR 9.1 bn.
• Banks under the SRB’s remit issued EUR 117.7 bn of MREL-eligible instruments, which was significantly higher compared to the previous quarter, as well compared to the same period of 2020-2022.
• After spiking in mid-March following the turmoil generated by the Silicon Valley Bank (SVB) and Credit Suisse crises, funding costs tightened from May onwards, allowing banks to benefit from favourable issuance conditions. Smaller issuers also took advantage of improved market conditions to return to the market. At the end of July, funding costs were hovering close to their level ahead of the turmoil showing that market confidence is being restored.
• With the end of the transition period approaching (1st January 2024), the SRB will continue monitoring the closing of the shortfall and the MREL funding conditions.

The report may be accessed through this link

EBA publishes Report on the implementation of the European Resolution Examination Program

On 3rd August the EBA published a report which monitors the progress made by resolution authorities in embedding the key topics identified in the EBA’s 2022 European Resolution Examination Program (EREP), with a view to fostering convergence in resolution practices. The report observes that, overall, resolution authorities incorporated the work priorities set by the EBA, with MREL monitoring being a key focus.

The EBA observed that the MREL monitoring was a key activity of focus for all resolution authorities, reflecting the criticality of this element to ensure feasibility of potential resolution actions. As of December 2022, resolution authorities were, overall, confident that most banks would reach their final requirements within the required deadline.

2022 was generally the first year when the MIS for valuation was considered high priority area, with most activities focused on initial preparatory tasks. While resolution authorities expect that most banks will have adequate capabilities in place by 2024, this may require specific IT system improvements and identification and/or recruitment of staff with appropriate experience

In 2022, banks were requested to produce a first set of specific deliverables in the area of liquidity in resolution, focusing on identification and mobilisation of collateral. Strategies and actions suggested by institutions to support liquidity in resolution remained limited and mostly focused on accessing central bank facilities.

The report may be accessed through this link

FSB publishes report on the Deployment of Unallocated Total Loss-Absorbing Capacity (uTLAC): Considerations for Crisis Management Groups (CMGs)

On 27th July the FSB published a report on the Deployment of Unallocated Total Loss-Absorbing Capacity. The Total Loss-Absorbing Capacity (TLAC) standard has been designed so that failing global systemically important banks (G-SIBs) will have sufficient loss-absorbing and recapitalisation capacity available in resolution.

TLAC resources that are not distributed to material sub-groups in excess of those needed to cover risks on the resolution entity’s solo balance sheet are known as unallocated TLAC (uTLAC). uTLAC could provide a pool of readily available and fungible resources of the resolution entity that can be used in a flexible manner to address capital shortfalls at the level of (i) the resolution entity, (ii) material sub-groups beyond what can be covered by internal TLAC and/or (iii) any other direct or indirect subsidiary in line with the resolution strategy.

The report focuses on the identification of corresponding assets in which uTLAC is held, as well as the analysis of their deployment, in particular in a cross-border context, and identifies potential legal, regulatory and operational challenges that may arise.

This FSB report may be accessed through this link. 

EBA publishes report on the monitoring of Additional Tier 1 capital, Tier 2 capital and TLAC/MREL eligible instruments of EU institutions

On 21st July the EBA published an updated report on the monitoring of Additional Tier 1 (AT1), Tier 2 and total loss absorbing capacity (TLAC) and (MREL) instruments of European Union (EU) institutions.

The Report merges the information of the two previous separate reports in these fields and adds new recommendations on certain contractual clauses of the corresponding documentation. By merging the contents of these two reports, the EBA aims to facilitate the reading and to highlight the commonalities in terms of eligibility criteria between own funds and eligible liabilities instrument.

Overall, the EBA has observed convergence and standardisation in terms of drafting of the terms and conditions of the instruments and issuance programs, also as a result of the implementation of previous EBA recommendations. The EBA expects that forthcoming issuances will continue to retain a high level of standardisation in their terms and limit complexity.

In light of the results of the continuous monitoring activities, a few new recommendations have been added. In particular, TLAC/MREL disqualification events clauses in own funds issuances are deemed acceptable; risk-adjusted capital Tier 2 instruments (RAC Tier 2) are discouraged; alignment event clauses are allowed under certain conditions; institutions should be able to demonstrate that interest rate reset mechanisms do not entail incentives to redeem; a certain degree of supervisory flexibility has been introduced on tap issuances from small issuers, in particular in case of episodes of market volatility. Finally, the report explains some investigations that the EBA is conducting on the prudential valuation of non-CET1 instruments. Going forward, the EBA will continue to monitor the quality of the AT1, Tier 2 and TLAC/MREL instruments and stand ready to provide additional guidance where necessary.

This updated report may be accessed through this link.

EBA publishes Final Report on the Guidelines on Overall Recovery Capacity in Recovery Planning

On 19th July, the EBA published a Final Report on the guidelines on overall recovery capacity in recovery planning. The Guidelines establish a consistent framework for the determination of the Overall Recovery Capacity (ORC) by institutions in their recovery plans and the respective assessment by competent authorities and aim at strengthening institutions’ effective crisis preparedness.

The objective of the ORC is to provide a summary of the overall capability of the institution to restore its financial position after a significant deterioration by implementing suitable recovery options. The assessment by competent authorities of an institution’s overall recovery capacity allows to understand to what extent an institution would be able to recover from a range of potential crisis situations.

The main goal of the Guidelines is to harmonise the observed practices on the ORC determination and assessment, so as to improve the usability of recovery plans and make crisis preparedness more effective.

The Guidelines are composed of two sections.

i)      Section 1 is addressed to institutions and aims at providing guidance on the relevant steps to set-up a reliable ORC framework.

ii)       Section 2 is addressed to competent authorities and complements the framework by harmonising the core elements of the competent authorities’ assessment of the ORC from both a quantitative and qualitative perspective.

The Final Guidance on ORC in recovery planning may be accessed through this link. 

European Parliament: Deal reached to finalise reforms of banking rules

Parliament negotiators on 29th June struck a deal to make EU banks resilient to economic shocks and implement the international Basel standards while taking into account specificities of the EU economy. Negotiators from the European Parliament, the Council and the Commission struck a provisional deal on changes to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD).

Capital Requirements

In CRR, negotiators agreed that the “output floor” calculated by banks using internal models should be applied at an entity level. However, Parliament negotiators made sure that by 31 December 2028, the Commission would asses the overall situation of the banking system in the single market, in close cooperation with the EBA and the ECB, and report to the European Parliament and to the Council on the appropriateness of the Union regulatory and supervisory frameworks for banks

Environmental and crypto risks

Negotiators agreed that financial institutions should take into account environmental, social and governance (ESG) risks when assessing the value of collateral. The EBA is mandated to assess whether a dedicated prudential treatment for exposures to ESG risks would be warranted. To address potential risks, MEPs also made sure that banks will have to disclose their exposure to crypto-assets.

Assessment of the members of the banks’ managements boards

In CRD, MEPs pushed for provisions to avoid unsuitable persons on the management boards of large financial institutions. Agreed provisions should also promote diversity and gender balance. Where the competent authority does not have sufficient information to conduct sustainability assessment, or as major concerns on the suitability of the candidate, it may require that the intended appointee does not take up his/her position before the required information has been provided or the concerns addressed.

EBA launches public consultation on amendments to the ITS on disclosures and reporting on MREL and TLAC

On 7th July the EBA launched a public consultation on amendments to the draft Implementing Technical Standard (ITS) on disclosure and reporting of the minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbency requirement (TLAC). These amendments aim to reflect changes to the prudential framework that came or will soon come into force and provide clarifications on the information to be reported in the insolvency ranking templates.

The ITS introduce amendments to:

i)       information on the requirement to deduct investments in eligible liabilities instruments of entities belonging to the same resolution group (‘daisy chain’ framework)

ii)       information on the prior permission regime for buying back eligible liabilities instruments issued by the reporting entities and groups, and

iii)      the breakdown by insolvency ranking.

These amendments are envisaged to apply for the reference date of June 2024. The deadline for submission of feedback was last 18 August and it is expected that feedback on the consultation will be published by the EBA in the coming weeks.

The consultation paper may be accessed through this link.

Single Resolution Fund grows by €11.3 billion to reach € 77.6 billion

On 6th July, the SRB announced through a press release that the contributions being made by banks to the Single Resolution Fund (SRF) for 2023 was €11.3 billion.

The Fund has been built up over the past eight years and will reach around €77.6 billion, taking into account the current annual growth in covered deposits.

Chair of the SRB Dominique Laboureix stated: “With these contributions, we continue to build up the SRF which is on track to be fully stocked by the end of this year. The growing capacity of the Fund, improves SRB’s ability to preserve financial stability and to protect tax payers from bail-outs”

The SRF is made up of contributions from 2 777 credit institutions and investment firms in the EU’s 21 Banking Union countries. These contributions were calculated according to EU law and collected via the national resolution authorities, with the money then being transferred to the SRF, which is managed by the SRB. The SRB will continue to monitor the fund and will make sure it always covers at least 1% of covered deposits

A link to the press release may be accessed through this link.