EBA announces revamp of Pillar 2 estimation model for MREL

The European Banking Authority has proposed to change how it calibrates banks’ minimum requirement for own funds and eligible liabilities (MREL).

The EBA published its consultation paper on 24 July.

In the paper, the EBA suggests a new capital and combined buffer requirements estimation methodology, which resolution authorities can use as an input when they calibrate MREL under the EU’s Bank Recovery and Resolution Directive (BRRD).

The EBA suggests applying a 5% materiality threshold to resolution groups that are significantly different from the prudential group for which capital requirements have been set.

In line with this threshold, the EBA advised on two methods – “top-down” and “bottom-up” – which regulators should use to estimate capital requirements for resolution groups that are more than 5% different from the banking groups they belong to in terms of total risk exposure amount (TREA).

Under the “top-down” approach, the EBA says resolution authorities can adjust a whole banking group’s Pillar 2 requirements, and not just those for the financial institution seeking resolution. It says that such adjustments should only be done on the basis of the input provided by the relevant regulator in the resolution authority’s own jurisdiction.

The paper advocates a more limited scope of possibility for adjustment to ensure that capital-setting responsibilities remain with those authorities who would eventually need to authorise the resolved entity or group.

In the event that a competent authority provides no input for adjustment, the EBA says the resolution authority should then use the group requirement to calibrate MREL at the resolution group level.

The EBA also outlined the alternative “bottom-up” approach for situations where at least one of the solo requirements set on entities comprising the resolution group is higher than the group requirement. In that case the EBA says a resolution authority can apply the weighted average of individual Pillar 2 requirements, if that is higher than the adjusted group requirement.

Until now, resolution authorities have generally calibrated MREL by using the capital requirements for the banking group to which a financial institution belongs.

However, MREL is calibrated on the basis of going-concern capital requirements that are, for some, set at group level – with a perimeter that differs from the resolution group’s perimeter.

The EBA notes that some cases can present significant differences, most often for institutions with a multiple point of entry strategy, which can result in group capital requirements that under- or over-estimate the risks within a resolution group.

The finalisation of the draft technical standards and communication to the European Commission is planned for December, in line with a risk reduction measure roadmap the EBA published in November 2019.

At the same time, the EBA also released a consultation paper aiming to tailor the way resolution authorities report information to it.

The regulator says the draft implementing technical standards (ITS) set out in the paper would substitute its previous standards on MREL reporting, to properly reflect the changes introduced in the BRRD in 2019.

The EBA says resolution authorities are required, “on a best effort basis, to provide a condensed explanation on the adjustments made to the default MREL amount”.

The new standards include “notes” fields in its submission forms, which the regulator says will be crucial to its assessing divergences in the levels set for comparable institutions across member states.

“The ITS remain flexible about the exact form of the explanation, and allow cross-reference to resolution plans, public decisions, policy statements of the resolution authority, or other supporting documents,” the paper says.

The deadline for the submission of comments for both papers is 24 October.

Get unlimited access to all Global Banking Regulation Review content