TLAC & MREL

MREL was first introduced by the Bank Recovery and Resolution Directive (BRRD) as an individual Pillar-2 measure. The Basel Committee on Banking Supervision’s (BCBS’s) standard on TLAC holdings, on the other hand, calls for global systemically-important banks (G-SIBs) to hold 16 % of risk-weighted assets (RWAs) and 6 % of the total exposure measure (as defined for the leverage ratio) for loss absorption as a binding Pillar-1 measure.

New harmonized rules for TLAC and MREL were among the first measures of the Banking Package to become applicable on 27 June 2019, 20 days after the publication of the revisions to the Capital Requirements Regulation (CRR) in the Official Journal of the EU. The new regulations deliver a clear definition of all the liability components eligible for resolution and instructs national resolution authorities in the handling of resolutions through guidelines defining hierarchies of creditors and liabilities.

In the CRR II, a minimum TLAC is mandatory for all global systemically important institutions (G-SIIs). Starting from 2022, the minimum required TLAC will be 18 % of RWA and 6.75 % of total exposure for G-SIIs based in the EU. Affiliated financial institutions operating in the EU of third-country G-SIIs must comply with the regulation by holding at least 90 % of the required TLAC. MREL, on the other hand, will continue to be set individually for each institution by its resolution authority, except for so-called “top-tier” institutions, which have total assets of at least €100bn. According to the CRR II, top-tier institutions will also have to comply with a minimum of 13.5 % of RWA and 5 % of total exposure starting in 2022. In addition, as a backstop measure, all G-SIIs, top-tier institutions, and other institutions deemed as relevant with respect to resolution must ensure a sufficiently subordinated MREL of 8 % of total liabilities, including own funds (TLOF), unless otherwise sanctioned by the resolution authority.

Supervisors currently require large European banks to hold on average 10.5 % of common-equity Tier-1 capital (CET1) (according to SAFE Policy Report No.1, March 2019, p. 55), so that this same “average” institution will need to provide additional own funds and eligible liabilities of 7.5 % of RWA plus a minimum of 2.75 % of total exposure starting from 2022.

With the introduction of the banking package, TLAC/MREL liabilities will have to comply with more stringent criteria, i.e., repurchase or repayment measures must be agreed to by the competent authorities. Derivatives will be excluded. For all the instruments issued after 31 December 2021, the subordination of the liabilities must be written down in the contract conditions or defined by law. TLAC holdings, that is, investments in TLAC liabilities of G-SIIs, must be deducted from the institution’s own TLAC liabilities. The European Banking Authority (EBA) must decide whether this policy will be extended to other systemically important institutions (O-SIIs) within the next three years.

On 3 August 2020, the EBA published EBA/ITS/2020/06, its final draft implementing technical standards (ITS) on disclosure and reporting on MREL and TLAC according to the mandates given to it by the CRR II and BRRD II. The provisions of these ITS for disclosure on TLAC are to apply immediately after their adoption by the European Commission and entry into force. In contrast, the provisions on disclosure on MREL will apply from the date of expiration of the relevant transition periods pursuant to Art. 45m of the BRRD, i.e., not earlier than 1 January 2024. The first reference date for quarterly reporting with respect to both MREL and the TLAC requirement is expected to be 30 June 2021. The EBA’s data point model, an XBRL taxonomy and validation rules for reporting based on the final draft ITS are expected in the third quarter of 2020 as part of Reporting Framework 3.0.

Table 1: Breakdown of reporting requirements (* Cons/Ind = consolidated or individual, depending on the existence of a group, or depending on other requirements in the case of entities that are neither resolution entities nor material subsidiaries of non-EU GIIs)

EBA attempted to integrate the existing liabilities structure (LIAB) template from the ITS on resolution planning reporting into its new TLAC/MREL reporting framework; however, this was not possible due to important differences in the reporting requirements. Nevertheless, the current framework does draw on the liability breakdown by instrument found in the existing LIAB template but covers only the funding of eligible liabilities.

The new TLAC/MREL requirements are no small challenge for banks. In addition to the requirements for data systems and automation processes, the new regulation requires preliminary work to ensure the correct application of the new definitions and categorization of liabilities. Finally, the implementation of TLAC and MREL will likely have an impact on middle- and long-term financing operations and strategies. Large institutions will have to put in place consistent and reliable implementation plans as soon as possible.