DIFFERENCES BETWEEN TLAC AND MREL REGULATION

After the financial crisis regulatory authorities stepped in by developing controls and legislation to mitigate the chances of future bank bailouts. Recent regulatory standards focus on the structure of banks in order to make them more robust and reduce risk of colossal failure. These standards have pushed banks to restructure entities, assets and put in place recovery and resolution plans that help prepare for worst case scenarios.

Ahead of  the 2nd Annual Bank Structuring and Resolvability Conference, we spoke with David Blache, Deputy Head, Resolution Directorate at ACP/Banque de France, about the differences between TLAC and MREL regulations and how they will impact resolution plans.

What are the differences between TLAC and MREL regulations and how will they impact resolution plans? 

David Blache
David Blache

Despite having the same objective of providing that sufficient loss-absorbing capacity is available in the event of a resolution, the TLAC and the MREL regulations are not totally similar in their features, especially regarding their scope and the “Pillar1 versus Pillar2” approach.

First, the scope is different. While the MREL requirement applies to all credit institutions and (most) investment firms in the European Union, the TLAC requirement only concerns G-SIBs. For the sake of efficiency and level-playing field in the Single Market, we think that the implementation of TLAC in the E.U. should also apply to D-SIBs. Both are “bail-inable banks”, i.e. banks for which the preferred resolution strategy is based on the potential use of the bail-in tool. It would not be reasonable to believe that only G-SIBs would be resolved and subject to bail-in. D-SIBs and other bail-inable banks would have to be recapitalised as well.

Second, the MREL requirement is based on a case by case approach (“Pillar 2”) which should, inter alia, take into account each bank’s characteristics: preferred resolution strategy, resolvability assessment, complexity, risk profile, etc. Regarding the TLAC requirement, we consider that all bail-inable banks should be subject to the same “Pillar 1” (i.e. minimum TLAC) requirement. To this Pillar 1 requirement should be added a Pillar 2, firm-specific, requirement.

As a consequence, elements of the resolution plans and results of the resolvability assessment process should, in the future, impact the calculation of the MREL requirement for each firm/group. In 2016, the Single Resolution Board (SRB) decided not to set a binding individual MREL for the banks under its direct remit, but a “MREL target”, on a consolidated basis. This MREL target is intended to “begin the journey towards MREL” as indicated by the Chair of the SRB and to help the banks anticipate the binding requirement to come. Of course, we are aware that in the future the individual MREL requirements will have to take into account firm-specific features.

How will capital regulations be aligned for EU Banks?

In 2017, the transposition of the TLAC requirement into EU law will have a significant impact on MREL requirements and the European Commission has proposed very recently amendments to CRR and BRRD to this end.

We welcome the introduction of a requirement strictly transposing the FSB Term-sheet on TLAC without “gold plating” but including all the components of TLAC, in particular, the inclusion of a part of senior bonds issued by G-SIBs, which reflect that every rank of negotiable debt is potentially bail-inable. With the adoption of this proposal, the European Union will be up to its international commitments.

In addition, and for the sake of efficiency and level playing field in the Single Market, the TLAC requirement should apply to the bulk of bail-inable banks, as I indicated above, and stand as the Pillar 1 component of MREL. Calibrating the MREL must rely on the TLAC standard and the EBA RTS on MREL, which will ensure a proper alignment of requirements for EU banks within the Single Market.

These proposals tend towards the reconciliation of the MREL and TLAC requirements by setting up a Pillar 1 matching with the TLAC requirement and a Pillar 2 set by the resolution authority.

It is also important to prevent the introduction of a general subordination criterion in the MREL setting, as this would not be consistent with the BRRD. Beyond the TLAC-type Pillar 1 for systemic entities, partial or full subordination should be required only on a case by case basis. In addition, in the event of a fully subordinated MREL, it is highly unlikely that the financial markets would be able to absorb such an amount of subordinated debts even over a reasonably long transition period. Bank senior debt (‘plain vanilla’ bonds) and subordinated debt markets are of different nature. So is their respective investor base. The turmoil on the AT1 market earlier this year was a clear reminder of that situation.

How can banks overcome the practical challenges in the implementation process? 

In France, an important new instrument for banks to comply with the TLAC/MREL requirements is the use of the new class of assets called “non-preferred senior” negotiable debt, thanks to the adoption of the so-called “Sapin II” law on 8 November.

These new securities will rank between subordinated debt and preferred senior unsecured debt and will need to have a maturity of more than one year.

The main advantages of this new class of debt are:

  • the absence of retroactivity,
  • the absence of impact on existing senior debt’s cost and (probably) on French bank’s refinancing costs,
  • the flexibility: any future senior issuance would need to contractually specify its ranking (by default, it would be “preferred”), so that institutions will be able to issue either “junior senior” or “senior senior” debts,
  • the greater legal certainty and the prevention of NCWO and paripassu issues.

To promote adequate information of investors, banks will need to explicitly refer to the “un-preferred” ranking in the terms and conditions of their issues of “non-preferred senior”.

Now we have, as resolution authority, to take account of this new instrument in the resolution planning of French banks, while other competent authorities have to monitor that selling practices comply with relevant requirements for the adequate information of investors. 

What would you like to achieve by attending the 2nd Annual Bank Structuring and Resolvability Conference? 

The French resolution authority has always been attentive to keep the banks and the markets informed, for the sake of transparency and for allowing a better anticipation by the banks of the new regulatory requirements.

This meeting represents a chance to continue the dialogue.

About the speaker:

David Blache is Deputy Executive Director for Resolution at ACPR (the French National Resolution Authority, which is notably in charge of 4 G-SIBs). He has previously held several positions in Legal, Licensing, European and International Affairs, at the French central bank and supervisory authority, and at the European Central Bank. He is the author of law books on U.S. Banking Law and on E.U. Banking Regulation. He is a member of the Scientific Committee of the (French) Banking and Finance Law Review (“Revue de Droit Bancaire et Financier”).

About the event:

This marcusevans event will give banks practical insights into how banks should implement regulations with examples on how other banks have organized their units. The conference will also provide insight from regulators on the practicalities of implementing the required structures as well as how it will all works in practice during resolution.

The 2nd Annual Bank Structuring and Resolvability Conference  will take place from the 20th until the 21st of February 2017 in London, UK

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