A LOT OF people leapt on the launch this past week of the EBA’s public consultation on its interim report on the implementation and design of MREL. It’s hardly beach reading but the deadline for responses is August 30, so stick it in your suitcase as you head off on vacation.
The EBA will take into account any responses it receives to complete its mandated final report on MREL implementation that has to be with the European Commission by October 31, so the EC has the findings at its disposal in drafting the legislative proposal on implementing the TLAC standard in the EU and reviewing MREL, which it has in turn committed to bringing forward by the end of the year.
All very nicely synchronised. But leaving aside the almost impenetrable complexity and alphabet soup of acronyms that peppered the interim report (and which pepper the topic in general to the bemusement of the banking and investment industries) the whole thing is set on such a tight schedule that I wonder if it isn’t all too rushed and too late.
Bearing in mind the report didn’t address everything and additional elements will be covered in the final report, isn’t its utility destined to be limited? Then again, I guess we at least got some numbers around the quantum of financing capacity and needs of EU banking groups.
Except we’re told that the numbers are in effect guesswork “subject to several methodological caveats” and based on illustrative scenarios, because the size of refinancing existing debt with MREL-eligible or TLAC-eligible instruments and of issuing new MREL-eligible liabilities can’t be determined as this will depend on bank-specific decisions (including resolution strategies) that haven’t been taken.
In the circumstances, the point of throwing out numbers that swung wildly between upper and lower ranges wasn’t entirely clear.
We got financing needs of €130bn based on current minimum MREL eligibility requirements and including capital buffers only in the loss-absorption amount (aka the LA buffer); double that amount (€260bn) if term corporate deposits are excluded; €290bn if buffers are included in both the recap and loss-absorption amounts and banks are required to have at least 8% of TLOF in MREL; €470bn if term corporate deposits are excluded. (see story page 16)
And “depending on different hypothetical scenarios” there’s an additional loss-absorbing capacity need in the range of €340bn to €790bn if senior unsecured debt is excluded from MREL and an equivalent increase in junior debt instruments is required. Not sure what we’re supposed to make of all of that.
HERE’S ANOTHER THING that grinds my gears. At the top of the half-dozen recommendations in the EBA report is one that seeks to achieve alignment between CRR/CRD regulatory requirements and TLAC (and reduce complexity without substantive changes to the MREL-setting process) by switching the MREL reference base from total liabilities and own funds to RWA with, in time, a leverage ratio exposure backstop in parallel with the phase-in of the leverage ratio requirement within the capital framework.
Plan B is to switch MREL calibration to leverage ratio exposure as a more consistently-applied non-risk sensitive measure. Plan C is clarifying the definition of the existing denominator either in Level 1 text or through the introduction of a Level 2 mandate.
Ever since we got the capital/TLAC and MREL blueprints, policymakers have gone to great lengths to ensure mutual cognisance of developments but have at the same time stayed on their parallel tracks. But the EBA considers now (depending on interaction with automatic restrictions on voluntary distributions) that maintaining a coherent link between MREL and capital requirements would be simpler if both used a consistent denominator.
And it thinks that consistency between the MREL and capital frameworks would be improved by a consistent approach to the stacking of capital buffers with minimum requirements of all kinds, as proposed in the TLAC standard.
There’s been an awful lot of talk about coherence and consistency in and around the evolving capital and resolution debate. But if those watchwords were enshrined in the process from the get-go, I suspect the MREL and TLAC truck drivers might not have insisted on taking different routes in different models when they had plotted the same GPS co-ordinates and were heading for the same destination. Travelling in convoy might have been the better option if they couldn’t sit in the same cabin.
As I’ve written before, this entire issue has become so convoluted and drawn out that people have become fatigued by it. I sense more than a subtle change in the attitude towards bank capital and resolution.
The intense complexity of the emerging frameworks, inherent uncertainties about whether they will be fit for purpose, the political hot potato of bailing-in retail; and EU rules that tie the hands of sovereign governments in resolving their banking sectors are starting to create a groundswell of support for something altogether simpler.
There may be no going back to the notion of taxpayer bailouts but I wonder if a recalibrated notion of State Loans 2.0 extended with a clear profit motive for the public purse (and devoid of any negative semantic baggage around taxpayers footing the bill for fat cat bankers) to keep distressed banks afloat as going concerns while they fix their problems won’t start to be seen as a better way forward.
