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Resilience of the EU financial sector in the global context - Workability of cross-border bank resolution

TLAC and MREL features need to be neutral for different business models

By González-Páramo José Manuel - Board Member, Banco Bilbao Vizcaya Argentaria (BBVA)


A central premise of the new regulatory framework is that future bank recovery and resolution will be supported by shareholders and private creditors through the bail-in tool. In order to make this new paradigm credible, banks must at all times have enough liabilities to absorb losses. That is, European banks need to comply ex-ante with a minimum requirement of eligible liabilities and own funds (MREL), TLAC being its international version. However, there is currently a lot of confusion concerning the way they will work in practice.

Concerning MREL, authorities will set banks’ target level very soon. However, at this point, this new requirement’s definitive configuration is still uncertain. More clarity, or more time, is needed for financial entities to start adapting their capital planning and issuing new loss absorbing instruments.

Despite sharing the same objective, MREL has significant differences with TLAC. The compatibility in Europe of both ratios is a crucial element to ensure consistency and guarantee a level playing field. To this end, regulation should ensure that all business models are feasible. Hence, TLAC and MREL features need to be neutral for different business models, avoiding artificial changes in the nature of the entities or their resolution strategy -Multiple Point of Entry (MPE) vs Single Point of Entry (SPE) -.

TLAC and MREL imply huge issuance needs. The question of the investors’ base is crucial. The bulk of these instruments will be purchased by institutional investors with a good knowledge of their risks. Authorities want to discourage banks to invest in these products to avoid contagion. But, under certain conditions, they should allow banks to hold TLAC/MREL instruments for market making purposes.

TLAC and MREL features need to be neutral for different business models.

Another crucial aspect is the debate on debt subordination. Although not all the jurisdictions need to have exactly the same hierarchy scheme, a certain minimum level of harmonization is necessary. In Europe, and especially in the Eurozone, the need for harmonization is much higher. The Eurozone is in the process of becoming a single jurisdiction, which implies that there should be no significant differences in subordination, in order to give institutions and investors certainty, clarity and predictability about the treatment of the instruments they have invested in, to maintain the attractiveness and competitiveness of European markets and to ensure a level playing field.

To conclude, more clarity on these topics is of the essence. Banks need to start issuing considerable amounts of TLAC/MREL instruments and investors require a clear understanding of these products and under what conditions they will assume losses.