Speakers of the session
Member of the Executive Board, European Central Bank (ECB)
MEP, Committee on Economic and Monetary Affairs, European Parliament
Resolution Director, Autorité de Contrôle Prudentiel et de Résolution (ACPR)
Chair, Single Resolution Board (SRB)
Director, Office of Complex Financial Institutions, Federal Deposit Insurance Corporation (FDIC)
José Manuel González-Páramo
Member of the Board of Directors, Banco Bilbao Vizcaya Argentaria (BBVA)
Group Treasurer, Standard Chartered Bank
Head of Recovery and Resolution Planning, BNP Paribas
Objectives of the sessionBanks need to issue significant amounts of TLAC/MREL instruments and investors require a clear understanding of these products and under what conditions they will assume losses.
In such a context, the objective of this session is to discuss the remaining challenges regarding the EU resolution framework taking into account the global context. Speakers will also be invited to assess the obstacles to the smooth resolution of a global bank.
Points of discussion
What are the remaining challenges regarding the EU resolution framework taking into account the global context?Bail-in approach and resolution arrangements:
- What are the main concerns regarding the differences between MREL and TLAC? Is it possible to reconcile the TLAC standard for global systemically important banks with MREL which will apply to all banks of the EU (e.g. calibration, eligible criteria etc.)?
- Who is expected to invest in such instruments? Is the European resolution and bail-in regime sufficiently stable and well-understood by potential investors? Do the suggestions of the BCBS on the treatment of TLAC holdings affect the potential market for TLAC eligible instruments?
- What are the consequences of the TLAC requirements on the Bank Recovery and Resolution Directive adopted in 2014? What are the challenges posed by inconsistent approaches of EU Member States regarding the degree of seniority of the diverse liabilities in banks ‘balance sheets in the EU? Are there amendments to be made to BRRD to clarify the European framework?
- What are the lessons learnt from the on-going restructuring of the Italian banking system for the EU resolution arrangements?
Global crisis management framework: Is it now effective and workable? Are there any remaining challenges or obstacles to the resolution in an orderly manner of a global bank?
- Living wills: Can sufficient consistency be achieved in the EU and globally between domestic and group-wide recovery and resolution plans for a given financial institution?
Has the resolvability of cross border banks improved enough to reduce the ring-fencing currently imposed by supervisors?
Is there a need to improve the cooperation and confidence between home/host supervisors and resolution authorities so that MREL/TLAC can absorb losses wherever they occur within a banking group, without any restrictions in order to avoid excessive costs? Are there differences in this regard between Single Point of Entry (SPE) and Multiple Point of Entry (MPE) approaches?
- Is there a risk that the resolution authorities in a given jurisdiction may not have enough bail-inable instruments available, whether or not the G-SIB is structured as SPE or MPE, in the event of a major issue arising in a subsidiary in that jurisdiction, whilst MREL/TLAC may be blocked on other jurisdictions where they are not needed (brittleness problem) ?
- Beyond the mutual confidence built over time, do supervisors have the legal backing to achieve effective cross-border resolution? What are the issues raised in this respect by contractual arrangements and statutory frameworks?
Background of the sessionG20 leaders have stated their objective to end the ‘too big to fail’ problem; financial institutions must be allowed to fail in an orderly way, without taxpayer support and avoiding disruption to the wider financial system. With the Dodd-Frank Reform and Consumer Protection Act of 2010 in the US and the Bank Recovery and Resolution Directive (BRRD) in Europe, policy makers have indeed made significant strides to foster greater market discipline.
Dodd Frank explicitly bans the bailout of an insolvent bank and drastically limits the Federal Reserve’s ability to provide liquidity support to a failing bank prior to its holding company being placed into receivership under the Federal Deposit Insurance Corp. (FDIC) as part of its orderly resolution authority. In Europe, the BRRD requires prior haircuts of a bank’s equity holders and creditors up to 8% of adjusted liabilities and equity before a potential call on the resolution fund can take place. The BRRD sets out a clear order of burden sharing. Liabilities are bailed in by reference to their ranking in terms of seniority. This means that in the absence of a sufficiently large buffer of equity and junior debt, senior creditors may need to be bailed-in prior to any bailout.
Effective resolution of a cross-border bank requires a high degree of trust between supervisors before, during and after resolution. Banks and resolution authorities are making significant efforts to put in place credible resolution plans on how to deal with situations which might lead to the failure of systemically important banks. Therefore, home and host authorities must share relevant information and interplay in order to take into consideration all components of the group or institution and make effective joint decisions. But some countries do not yet have a full resolution regime in place and of those that do, there are questions over whether they contain reliable measures for recognising or supporting the resolution actions of a foreign authority. This is the reason why the question is whether mutual confidence between supervisors needs to be supplemented by legally binding arrangements and what could be envisage to favour such arrangements.
The FSB principles acknowledge that statutory frameworks are not an immediate solution and state that contractual measures can provide the necessary legal backing in the interim. Resolution frameworks requiring banks to implement contractual solutions have been developing in parallel with the FSB work and, in the case of Article 55 of the Bank Recovery and Resolution Directive (which requires EU banks to include a recognition of bail-in clause in a wide range of non-EU law governed contracts), problems have been encountered both with its scope, which is far broader than envisaged by the FSB principles, and by clients and regulators in the countries it impacts being unfamiliar with its aims. So while contractual solutions have a role to play, they must be proportionate and coordinated.
TLAC and MREL: two sides of the same coin?
These two bail-in approaches ratios increase the effective leverage of banks, may encourage them to acquire higher-yielding and higher-risk assets since banks should issue additional and more expansive long-term debt and will increase the cost of the financing of the economies.
Otherwise, if the TLAC side of the coin is well defined, the MREL suffers from a lack of clarity. The Financial Stability Board (FSB) issued on 9 November 2015 the final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs).
G-SIBs will be required to meet the TLAC requirement alongside the minimum regulatory requirements set out in the Basel III framework. Specifically, they will be required to meet a minimum TLAC requirement of at least 16% of the resolution group’s risk-weighted assets as from 1 January 2019 and at least 18% as from 1 January 2022. Minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum) as from 1 January 2019, and at least 6.75% as from 1 January 2022.
This TLAC requirement includes the minimum regulatory capital requirements set out in the Basel III framework (“minimum regulatory capital requirements” – 8% of RWA in 2019) but does not include any applicable regulatory capital (Basel III) buffers (e.g. systemic buffer, conservation buffer, countercyclical buffer) which must be met by additional equity capital in addition to the TLAC RWA Minimum.
The FSB has defined a set of specific criteria that liabilities must meet to be eligible as TLAC. Only a proportion of the existing senior unsecured debt issued by continental EU banks (2,5% in 2019 up to 3.5% in 2022 when the TLAC RWA Minimum is 18%) will be eligible to TLAC.
Despite sharing the same objective, the minimum requirements for own funds and eligible Assets (MERL) has significant differences with TLAC due their scope and definition: TLAC sets a global standard for G-Sibs while MREL is for all EU banks. The TLAC requirement is set in terms of risk weighted assets (RWAs) and leverage while MREL is formally set in relation to total liabilities and own funds. TLAC is a Pillar 1 minimum requirement, while MREL is not a fixed figure: it must be set bank by bank by the resolution Authorities (the Single Resolution Board (SRB) in the euro area), on the basis of the resolution plan. Banks which are simpler, less risky and easier to resolve should expect to have lower MREL requirements.
The articulation between TLAC and MREL, between G-SIB and non G-SIB, must make common sense. Investors in particular need to be confident that there is fairness, legal certainty, as little as possible room for interpretation, and no opportunity for political pressure.