Recovery and Resolution Matters

Bank Recovery and Resolution Matters Newsletter

Welcome to the first in a series of quarterly Banking Recovery and Resolution Newsletters. In this newsletter, we will be providing a snapshot of publications, updates to legislation, guidance and consultations issued in the last quarter around the recovery and resolution framework.

This newsletter provides a high-level overview of the publications issued by the different EU and local stakeholders and bodies dealing with recovery and resolution matters, in the last quarter of 2021.  Apart from these quarterly newsletters, we shall be organising events as well as round table discussions focusing on Recovery and Resolution.  

SRB's approach to CRR discretion on leverage and MREL calibration

On 22 December 2021, the Single Resolution Board (SRB) published its approach to the Capital Requirements Regulation (CRR) discretion on leverage and Minimum Requirements for Own Funds and Eligible Liabilities (MREL) calibration.

The SRB will monitor regulatory changes related to competent authorities’ discretion to temporarily exclude certain exposures to central banks from the calculation of an institution’s total exposure measure (that is, leverage amount), as granted by the CRR. In September 2020 the European Central Bank (ECB) used this temporary measure to facilitate the implementation of its monetary policy during the Covid-19 pandemic. As announced by the ECB, banks may benefit from the relief measure until the end of March 2022.

The leverage ratio requirement and the leverage amount can influence the calibration of the final MREL targets as well as the compliance with the requirements at 1 January 2024.

Further information may be accessed through this link.

MREL reporting update: checklist on reported liabilities and sign-off form

On 17 December 2021, the SRB issued a reporting update whereby banks under the SRB’s remit are asked to use a checklist when preparing the quarterly reporting on MREL/total loss absorbing capacity (TLAC) under Article 1(a) of Commission Implementing Regulation (EU) 2021/763 (‘the quarterly reporting’).  Banks are also expected to complete a sign-off form with the submission of each quarterly reporting, in order to provide additional assurance on liabilities reported as eligible for MREL.

The checklist on reported liabilities is to be used by resolution reporting officers as a guide when filling out each quarterly reporting. It lists eligibility criteria and conditions that should be met for reported liabilities to be considered MREL eligible.

The sign-off form should be signed in line with Principle 1.1 indent 5 of the SRB’s Expectations for Banks (EfB) confirming that procedures and controls were put in place to ensure that the reported data in the quarterly reporting correspond to liabilities that meet the eligibility criteria in the legislation (Single Resolution Mechanism Regulation (SRMR), Bank Recovery and Resolution Directive (BRRD), CRR).

The sign-off form should be submitted to the relevant National Resolution Authority, starting with the quarterly reporting with reference date 31 December 2021.

Further information may be accessed through this link.

SRB issues the MREL dashboards for Q2 2021

On 02 December 2021, the SRB issued the MREL dashboards for Quarter 2 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 Q2.2021

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

MREL dashboards may be accessed through this link.

SRB publishes its updated operational guidance on operational continuity in resolution

On 29 November 2021, the SRB has published its updated operational guidance on operational continuity in resolution (OCIR). Way back on the 29th July 2020, the SRB has also published its guidance on the Financial Market Infrastructure (FMI) contingency plans. This follows the publication of the SRB Expectations for Banks document, which sets out the capabilities the SRB expects banks to demonstrate to show that they are resolvable including the dimensions of OCIR and access to FMIs.

The guidance on OCIR provides further clarifications to banks on how to implement SRB expectations related to service identification and mapping, assessment of operational continuity risk, mitigating measures such as having adequately documented, resolution-resilient contracts, appropriate management information systems and governance arrangements. In November 2021, the guidance was updated with additional details on topics related to financial resilience and staffing.  

The guidance on FMI contingency plans sets out the SRB’s expectations with regard to the minimum content of FMI contingency plans prepared by banks. Each bank is expected to develop an FMI contingency plan. The operational guidance provides further details on a possible outline of the contingency plan, as well as an indicative phase-in across FMI service providers.

Full guidelines may be accessed through this link.

SRB publishes its work programme for 2022 

On 26 November 2021, the SRB published its work programme for 2022. Amongst other areas, the top priorities for 2022 include:

• Achieving resolvability of SRB banks and less significant institutions (LSIs)
• Fostering a robust resolution framework
• Preparing and carrying out effective crisis management
• The operationalisation of the Single Resolution Fund (SRF)

Full report may be accessed through this link.

ESMA launches public consultations on CCP resolution regime

On 18 November 2021, the European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, launched six public consultations to gather stakeholder feedback on how to implement its central counterparty (CCP) resolution mandates as part of the resolution regime established under Regulation (EU) 2021/23 on a framework for the recovery and resolution of central counterparties (CCPRRR).

The six consultation papers (CPs) contain proposals for Draft Regulatory Technical Standards (RTSs) on:

• resolution colleges;
• the valuation of CCPs’ assets and liabilities in resolution;
• the safeguards for clients and indirect clients; and on
• the content of resolution plans.

They also contain proposals for Draft Guidelines on:

• the valuation in termination of contracts; and
• the application of the circumstances under which a CCP is deemed to be failing or likely to fail (FOLTF).

Harmonised CCP resolution measures will allow CCPs and the relevant regulators to be prepared for the measures and actions taken in a resolution process.

The closing date for responses is 24 January 2022. ESMA will organise an open hearing on the CPs on 14 January 2022. ESMA will consider the responses to these consultations with a view to publishing the final reports by Q2 2022.

Further information on these consultations may be accessed through this link.

The EBA sets first examination programme for resolution authorities

On 12 November 2021, the European Banking Authority (EBA) published a European Resolution Examination Programme (EREP) for 2022, which identifies key topics for resolution authorities’ attention across the European Union.

In line with its mission, the EBA proactively drives convergence in resolution practices through the selection of topics deserving European traction. These topics are identified based on the EBA’s expertise in EU-wide policy development, its role in colleges and on the practical experience of resolution authorities. The programme mirrors the European Supervisory Examination Programme (ESEP) that has applied to prudential supervision in recent years.

The topics identified in the EREP are also for consideration in 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.

Resolution authorities are expected to consider the following key topics when developing their 2022 priorities:

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

Full report may be accessed through this link.

EBA publishes guidelines on recovery plan indicators (EBA/GL/2021/11)

On 09 November 2021, the EBA published Guidelines on recovery plan indicators. The Guidelines establish a common EU approach for developing the framework of recovery plan indicators, providing additional guidance on indicators’ calibration, monitoring and breaches notifications. The guidelines aim at strengthening the quality of recovery indicators framework and contributing to effective crisis preparedness of institutions. 

The main objective of recovery plan indicators is to help institutions monitor and respond to the emergence and evolution of stress. The EBA first issued guidelines on recovery plan indicators in 2015 and decided to amend them based on practical experience acquired in recovery planning.

These Guidelines provide additional guidance on the calibration of thresholds of recovery indicators to ensure that recovery options are implemented early enough, so as to be effective. The Guidelines also emphasise the importance of constant monitoring of recovery indicators and timely notification of their breaches to supervisors. Lastly, the minimum list of indicators includes three new additional recovery indicators (MREL / TLAC), asset encumbrance and liquidity position) to the minimum list of recovery indicators and one of them (cost of wholesale funding) has been removed.

These guidelines will become effective on 09 February 2022.

The full guidelines may be accessed through this link.

Why not have one, neutral and integrated safety net system for resolution and deposit guarantee?

On 28 October 2021, Ms Tuija Taos, Director General of the Financial Stability Authority in Finland published an article on the SRB’s blog on the benefits of having an integrated system across the European Union Member States for the resolution and deposit and guarantee schemes.

This article delves into the benefits of such harmonisation, namely that an integrated system would add value and it offers more flexibility by increasing the credibility of operationalisation. For this to be achieved, more cooperation is needed.

The full article may be accessed through this link.

SRB publishes guidance on separability of banks in time of crisis

On 26 October 2021, the SRB published the operational guidance on separability for partial transfer tools. This operational guidance helps banks by providing more detail on how to concretely deliver the relevant information and analysis, namely through an analytical document known as the separability analysis report, as well as an operational document, called the Transfer Playbook.

This follows the publication of the SRB EfB document, which sets out the capabilities the SRB expects banks to demonstrate to show that they are resolvable.

Separability is a broad concept relevant to all resolution strategies. It is particularly relevant for banks for which the resolution strategy envisages a transfer tool, such as sale of business, asset separation tool and the bridge institution tool.

The full report on the guidance may be accessed through this link.

SRB updates the notification of impracticability to include bail-in recognition clauses in contracts

On 25 October 2021, the SRB published an update of its communication on how banks can notify the authorities when bail-in recognition clauses cannot be added to contracts under third-country law, following the publication of the delegated and implementing acts.

The update concerns:

• Adequate references to the Level 2 legislation;
• A requirement for banks to submit notifications, if any, in XBRL;
• Some practical instructions for banks reporting categories of liabilities/contracts, in line with the EBA Reporting Framework 3.0.

The updated operational guidance may be accessed through this link.

EBA replies to the European Commission’s call for advice on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance framework (EBA/REP/2021/31)

On 22 October 2021, the EBA published its advice to the EU Commission on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework. The EBA response provides a quantitative analysis on banks’ capacity to access available sources of funding under the current framework and under various creditor hierarchies, and with regards to the MREL.

The response also provides a descriptive analysis on banks’ capacity to access resolution financing arrangements (RFA) based on banks’ balance sheets and their business models, as well as an analysis based on a modelling approach to simulate crisis scenario.

The analysis, whose findings are presented under several different capital depletion scenarios, draws two main conclusions:
i) preferring deposits to other ordinary unsecured claims increases the number of banks that are able to meet the requirements to access RFAs without the bail-in of any type of depositors and
ii) a single-tier depositor preference comes with the highest impact on covered deposits  and the highest contributions from deposit guarantee schemes (DGS) compared to the other policy options and the current situation.

In a third part, the report also investigates the issue of market access for MREL instruments for small and medium-sized banks to. A limited number of these institutions had not yet issued senior MREL eligible instrument or additional tier 1 / tier 2 (AT1/T2) instruments as of end-2019.

The full response may be accessed through this link.

Commission Implementing Regulation (EU) 2021/1751 with regard to uniform formats and templates for notifications of determination of the impracticability of including contractual recognition of write down and conversion powers

On 01 October 2021, the Official Journal of the European Union (EU) has issued the Commission Implementing Regulation (CIR) (EU) 2021/1751 of 1 October 2021 laying down implementing technical standards for the application of Directive 2014/59/EU (the BRRD) of the European Parliament and of the Council with regard to uniform formats and templates for notifications of determination of the impracticability of including contractual recognition of write down and conversion powers.

Article 55 of the BRRD provides that under certain conditions Member States are to require institutions to include a contractual term by which the counterparty to an agreement or instrument creating the liability recognises that that liability may be subject to the write down and conversion powers. Furthermore, the BRRD also requires Member States to ensure that where such an institution reaches the determination that it is legally or otherwise impracticable to include such a term. In this regard this CIR specify uniform formats and templates for such notification to resolution authorities.

The full CIR may be accessed through this link. 

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