Banking Recovery and Resolution Matters - Newsletter Q4 - 2022

On 14 December 2022, the European Banking Authority (EBA) published a consultation paper on its draft Guidelines on the overall recovery capacity (ORC) in recovery planning. The Guidelines aim to set up a consistent framework for the determination of the ORC by institutions in their recovery plans and the respective assessment by competent authorities. 

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. The first one addressed to institutions, aims at providing guidance on the relevant steps to set-up a reliable ORC framework. The second one, addressed to competent authorities, complements the framework by harmonising the core elements of the competent authorities’ assessment of the ORC from both a quantitative and qualitative perspective.

Consultation process

Responses to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 14 March 2023.

A public hearing will take place via conference call on 14 February 2023 from 9:30 to 11:30 (CET).

The consultation document may be accessed through this link.

On 08 December 2022, the Financial Stability Board (FSB) published its 2022 Resolution Report. The report takes stock of progress made by FSB members in implementing resolution reforms and enhancing resolvability across the banking, financial market infrastructure, and insurance sectors. The report notes that while a lot of progress in resolvability has been made in the banking sector, multiple challenges lie ahead and sustained progress requires the continued commitment of authorities and firms. In particular, the largest cross-border resolution challenges that need to be addressed with some urgency remain in the non-bank sector:

• Banks – Resolution planning for global systemically important banks (G-SIBs) is maturing and the focus is shifting increasingly to fine-tuning and testing resolution preparedness. Funding in resolution remains an area of focus for both firms and authorities. The FSB has initiated work to investigate further legal, regulatory and operational obstacles to cross-border funding, which will continue next year. The FSB has also focused on assisting home and host authorities in having a clear understanding of approaches to unallocated Total Loss-Absorbing Capacity (TLAC).

• Central Counterparties (CCPs) – Effective resolution regimes and the availability of adequate resources for CCP resolution remain critical for financial stability. The FSB has been considering the costs and benefits of potential alternative financial resources and tools for CCP resolution, alongside a comparison to existing resources. Several potential alternative financial resources and tools have been identified for further analysis, with a plan to consult on policy options in 2023.

• Insurers – The FSB’s annual insurance resolvability monitoring exercise shows that there is still work to be done to make resolution plans for insurers fully operational. The report also looks at possible approaches to ensure the continued effective application of the Key Attributes’ resolution planning standards, should the identification of Global Systemically Important Insurers be discontinued and replaced by the International Association of Insurance Supervisors’ Holistic Framework for the assessment and mitigation of systemic risk in the global insurance sector. Work in 2023 will focus on the identification of critical functions that need to be maintained in resolution and on exploring resolvability issues related to group and conglomerate structures.

The FSB 2022 Resolution Report may be accessed through this link.

On 07 December 2022, the European Commission (EC) has put forward measures to further develop the EU's Capital Markets Union (CMU):  

• to make the European Union (EU) clearing services more attractive and resilient, supporting the EU's open strategic autonomy and preserving financial stability.
• to harmonise certain corporate insolvency rules across the EU, making them more efficient and helping promote cross-border investment.
• to alleviate – through a new Listing Act – the administrative burden for companies of all sizes, in particular small and medium sized enterprises (SMEs), so that they can better access public funding by listing on stock exchanges.

Clearing

The EU needs safe, robust and attractive clearing for a well-functioning CMU. If clearing does not function efficiently, entities operating in the financial markets, companies and investors face more risks and higher costs –as the 2008 financial crisis showed.

These measures will:

• Make our clearing landscape more attractive by enabling CCPs – which provide clearing services – to expand their products quicker and easier, and by further incentivising EU market participants to clear and build liquidity at EU CCPs.
• Help build a safe and resilient clearing system, by strengthening the EU supervisory framework for CCPs and drawing lessons from the recent developments in energy markets caused by Russia's aggression against Ukraine. For example, by increasing the transparency of margin calls, so that market participants (including energy firms) are in a better position to predict them.
• Reduce excessive exposures of EU market participants to CCPs in third countries, particularly for derivatives identified as substantially systemic by the European Securities and Markets Authority. Today's proposal requires all relevant market participants to hold active accounts at EU CCPs for clearing at least a portion of certain systemic derivative contracts. This will improve the management of financial stability risks in the EU.

Corporate insolvency

Each Member State has a different insolvency regime. This is a challenge for cross-border investors who have to consider 27 different sets of insolvency rules when assessing an investment opportunity.

This proposal will:

• Harmonise specific aspects of insolvency proceedings across the EU. For example, it includes rules on:
  • actions to preserve the insolvency estate (that is, avoiding actions by debtors that would reduce the value that creditors can get);
  • creditors' committees to ensure a fair distribution of the recovered value among creditors;
  • so-called “pre-pack” proceedings (that is, where the sale of the business is agreed before the insolvency starts);
  • and the duty on directors to timely file for insolvency to avoid that the value of the company deteriorates.
• Introduce a simplified regime for microenterprises to lower the costs of winding them down and to enable the companies' owners to be discharged from debt, granting them a fresh start as entrepreneurs.
• Require Member States to produce an information factsheet, summarising the essential elements of their national insolvency laws to facilitate decisions by a cross-border investor.

These measures will foster cross-border investment across the Single Market, lower the cost of capital for companies, and ultimately contribute to the EU's CMU. Overall, the benefits of the proposal are expected to exceed €10 billion annually.

Listing Act

Companies today face significant requirements when listing on public markets. For example, the length of prospectus documents can reach up to 800 pages.

The proposed amendments will:

• Simplify the documentation that companies need to list on public markets, and streamline the scrutiny processes by national supervisors, thereby speeding up and reducing the costs of the listing process whenever possible. For example, it is estimated that EU listed companies will save approximately €100 million per year from lower compliance costs, with companies saving €67 million per year from simpler prospectus rules alone.
• Simplify and clarify some market abuse requirements, without compromising market integrity.
• Help companies be more visible to investors, by encouraging more investment research especially for small and medium sized companies.
• Allow company owners to list on SME growth markets using multiple vote share structures, so that they can retain sufficient control of their company after listing, while protecting the rights of all other shareholders.

These measures will further develop the CMU by cutting unnecessary red tape and costs for companies. This will encourage companies to get and remain listed on the EU capital markets. Easier access to public markets will allow companies to better diversify and complement available sources of funding.

Proposals and other documents maybe accessed through the below links:

Clearing

• Text of the proposal for a Directive amending the Undertakings for Collective Investment in Transferable Securities Directive (UCITSD), the Capital Requirements Directive (CRD) and the Investment Firms Directive (IFD)
• Text of the proposal for a Regulation amending EMIR, the Capital Requirements Regulation (CRR) and the Money Market Funds Regulation (MMFR) • Communication on the path towards a stronger EU clearing system, accompanying the legislative proposals
• Impact assessment accompanying the proposals on clearing
• Summary of the impact assessment accompanying the proposals on clearing
• Timeline of the initiative on the review of the European Market Infrastructure Regulation (EMIR) and stakeholder's feedback
• Feedback statement to the targeted consultation on the review of the central clearing framework in the EU
• Factsheet: Capital markets union - A path towards a stronger EU clearing system
• More on Derivatives/EMIR

Insolvency

• Text of the proposal for new Insolvency Directive harmonising certain aspects of substantive law on insolvency proceedings
• Impact assessment accompanying the proposal on insolvency
• Summary of the impact assessment accompanying the proposal on insolvency
• Timeline of the initiative on the listing act and stakeholder's feedback
• More on action 11 of the 2020 capital markets union action plan
• More on insolvency proceedings

Listing

• Text of the proposal for a Directive on multiple-vote share structures in companies that seek the admission to trading of their shares on an SME growth market
• Text of the proposal for a Directive amending Directive 2014/65/EU to make public capital markets in the Union more attractive for companies and to facilitate access to capital for small and medium-sized enterprises and repealing Directive 2001/34/EC
• Text of the proposal for a Regulation amending Regulations (EU) 2017/1129, (EU) No 596/2014 and (EU) No 600/2014 to make public capital markets in the Union more attractive for companies and to facilitate access to capital for small and medium-sized enterprises
• Impact assessment accompanying the proposals on listing
• Summary of the impact assessment accompanying the proposals on listing
• Factsheet: Accessing public financial markets - simpler listing rules for companies, especially SMEs

On 15 November 2022, the EBA launched a public consultation on its draft Guidelines addressed to institutions and resolution authorities on resolvability testing. The Guidelines aim to set-out a framework to ensure that resolvability capabilities developed to comply with the resolvability and transferability Guidelines are fit for purpose and effectively maintained. The consultation runs until 15 February 2023.

Resolution authorities and banks should now move to the resolvability testing following several years of policy development by authorities and policy implementation by institutions. Both now need to ensure that the arrangements put in place to support the execution of the resolution strategy are in fact adequate and that institutions will be ready to use those in the run-up to and upon entry into resolution.

The Guidelines are also aiming to promote the involvement of firms into the resolvability assessment process and increase they ownership of resolvability. As such, as a starting point, they propose that institutions submit a resolvability self-assessment annually where to set out how they will meet the resolvability capabilities and how they have gained assurance of their adequacy.

On the basis of this self-assessment, the Guidelines are proposing that authorities develop multi-annual testing programme so as to gain assurance of firms’ resolvability while providing sufficient visibility to banks.

Finally, for the most complex banks, the Guidelines are proposing to have them develop a master playbook to ensure a holistic approach to resolution planning.

Consultation process

Responses to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 15 February 2023.

Documents may be accessed through these links:

• Consultation Paper on Guidelines amending Guidelines on improving resolvability for institutions and resolution authorities; and
• Resolvability Testing Guidelines - background and key measures.

On 04 November 2022, the SRB issued the MREL dashboards for Quarter 2 of 2022.

The minimum requirement for own funds and eligible liabilities (MREL) dashboards are based on bank data reported to the SRB and cover entities under the SRB’s remit. The first section of the dashboard focuses on the evolution of MREL targets for resolution entities and non-resolution entities2, the level and the quality of stock of MREL instruments and shortfalls in Q2.2022. The second section highlights recent developments in the cost of funding and provides an overview of gross issuances of MREL instruments in Q2.20223.

In Q2.2022, banks reported a reduction of the MREL shortfall including the Combined Buffer Requirement (CBR) against final (2024) targets for both resolution and nonresolution entities. As for MREL gross issuances reported during the quarter, their level decreased compared to the previous quarter while remaining broadly in line with the level of the same quarter last year.

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

MREL monitoring Q2.2022

1. MREL final targets for resolution entities
2. MREL instruments of resolution entities
3. Shortfalls of resolution entities
4. MREL targets and shortfalls of non-resolution entities

Market activity and cost of funding

1. Market access and MREL issuances
2. Cost of Funding

Methodological annex

1. MREL monitoring
2. Market activity and cost of funding
3. Confidential criteria

Key findings:

• The average MREL final target including the CBR for resolution entities, to be respected by 1 January 2024, was equal to 26.4% of the Total Risk Exposure Amount (TREA), remaining stable compared to Q1.2022.
• The average MREL shortfall with respect to the final 2024 targets, when considering the CBR, declined to  EUR 32.2 bn (or 0.4% TREA), i.e. by EUR 4.7 bn with respect to the previous quarter and by EUR 7 bn year-on-year.
• For non-resolution entities, the average MREL shortfall (including the CBR) continued its decreasing trend reaching the value of EUR 17.1 bn (or 0.8% TREA).
• Almost all banks met the MREL intermediate 2022 targets (including the CBR). The very few shortfall cases are being closely monitored.
• The maturity profile of the MREL instruments shows that 37% of the stock was composed by instruments with residual maturities between two and 10 years, while the share of short-term MREL debt (maturing between one and two years) was relatively low, accounting for around 7% of the total.
• SRB banks managed to issue MREL eligible instruments amounting to EUR 67.3 bn in the second quarter of the year, in reduction by around 20% compared to Q1.2022, but remaining broadly stable with respect to the same period of 2021.
• Deteriorated funding market conditions stemming from geopolitical tensions and high inflation resulted in higher spreads in Q3.2022. At the end of September, indexes on subordinated and senior financial debt registered the highest level since the beginning of the year, but they decreased throughout the month of October.

The MREL dashboard for Q2 2022 may be accessed through this link.

On 27 October 2022, the EBA published the European Resolution Examination Programme (EREP) for 2023, which identifies key topics for resolution attention across the European Union. The EREP is aimed at shaping resolution authorities` work priorities and respective practices.

In line with its mission, the EBA proactively drives convergence in resolution practices through the selection of topics deserving European traction. In doing so, the EBA builds on its expertise in EU-wide policy development, its role in colleges, as well as resolution authorities’ practical experience.

Resolution authorities are expected to consider the following key topics when developing their 2023 priorities:

• how MREL shortfalls are being addressed;
• the development of management information systems for valuation in resolution;
• preparations for managing liquidity needs in resolution;
• Operationalisation of the bail-in strategy.

The EBA will follow up on how these key topics, are (i) embedded in resolution authorities’ priorities for 2023, as well as (ii) reflected in their respective activities throughout the year. The topics identified in the EREP are also relevant for the EU resolution colleges. Engagement between home and host college members on these issues will enhance convergence of activity in the context of cross-border banking groups.

The EREP for 2023 may be accessed through this link.

On 25 October 2022, the Official Journal of the EU published Regulation (EU) 2022/2036 of the European Parliament and of the Council of 19 October 2022 amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institutions with a multiple-point-of-entry resolution strategy and methods for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities.

Regulation (EU) No 575/2013 - also known as the Capital Requirements Regulation (CRR) - established a single set of harmonised prudential rules, which banks throughout the European Union (EU) must respect. Directive 2014/59/EU established common rules in the European Union (EU) for the recovery and restructuring of failing banks.

This Regulation amends the EU's bank resolution framework by:

• incorporating a dedicated treatment for the indirect subscription of instruments eligible for internal minimum requirement for own funds and eligible liabilities (MREL);
• further aligning the treatment of global systemically important institution (G-SII) groups with a Multiple Point of Entry (MPE) resolution strategy with the treatment outlined in the FSB international Total Loss-absorbing Capacity Term Sheet (the TLAC standard)

The so-called Daisy Chain proposal was put forward by the European Commission on 27 October 2021, as part of the so-called 2021 Banking Package. Member State representatives adopted a general approach for this file on behalf of the Council of the European Union on 21 December 2021. The European Parliament adopted its negotiating position in February 2022. An informal agreement between the co-legislators on a compromise text for this file was reached on 28 April. This was formally endorsed by the Parliament on 13 September and by the Council on 4 October. The Act was signed by the co-legislators on 19 October 2022 and published in the Official Journal on 25 October 2022.

The Daisy Chain Regulation may be accessed through this link.

On 12 October 2022, the SRB and the European Central Bank (ECB) have reached an “in principle” agreement on the margin for redeeming eligible liabilities under Article 78a(1)(b) of Regulation (EU) No 575/2013 (CRR). The new “in principle” agreement is applicable to authorisations granted as of 1 January 2023, including General Prior Permission (GPP) renewals.

To redeem eligible liabilities, institutions need to demonstrate that they would meet their MREL and the CBR plus a margin after the transaction has been performed. The margin is set by the resolution authority in agreement with the relevant competent authority.

The SRB has reached an “in principle” agreement with the ECB on the margin that institutions will have to comply with in order to be authorised to redeem eligible liabilities. The margin will be set at the lower value of either the requested GPP predetermined amount or the institution’s Pillar 2 Guidance. Nonetheless, a different margin may be set depending on the circumstances of the case. This applies for institutions under the supervision of the ECB.

On 07 October 2022, the EBA published an updated TLAC/MREL monitoring Report. Following the first TLAC-MREL monitoring Report, the EBA has observed that its recommendations have been, overall, well implemented. However, it has identified the need for a few new notable provisions to be recommended and for some others to be avoided. This Report provides policy views based on TLAC/MREL instruments assessed up to February 2022 with a view to continue strengthening the quality of the instruments and to have more standardised information across the EU.

The EBA has observed convergence and standardisation in terms of legal drafting of the notes and programmes, deriving also from the actual implementation of the EBA recommendations from the first TLAC/MREL monitoring Report and the ESG recommendations in the latest AT1 monitoring report. Therefore, the updated Report integrates only a few new recommendations.

However, in light of the new observations on certain features of the issuances, new parts have been included in this Report, namely on make-whole clauses (to be disallowed), clean up calls (to be allowed) and substitution and variation clauses (for which prior approval is needed in certain circumstances). Furthermore, some sections have been updated based on new analyses, such as the one related to the netting & set-off waivers and dual governing law / bail-in. On the other hand, the observations on environmental, social and governance (ESG) instruments included in the previous report have been removed since the recommendations were published in the latest AT1 monitoring report. Finally, alignment with the AT1 Report findings/recommendations has been introduced where needed, including on regulatory & tax calls and supervisory approval for early redemptions.

Going forward, the EBA will continue to monitor the quality of the TLAC/MREL instruments issued also with the objective of covering as many jurisdictions as possible and enriching the observations and recommendations.

The TLAC/MREL report may be accessed through this link.