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EBA shows banks’ progress in planning for failure, but issues remain

The European Banking Authority (EBA) has published its first quantitative Report on minimum requirements for own funds and eligible liabilities (MREL) under a new methodology. The report shows that authorities have made strong progress in agreeing resolution strategies and setting related MREL requirements but it also notes that banks need to issue MREL eligible debt to close their shortfall.

222 European banks representing 80% of total assets are covered by a resolution strategy other than liquidation. This is reflective of the fact that authorities have progressed since the introduction of the Bank Recovery and Resolution Directive (BRRD) in 2014 and the fact that the majority of European banking assets are held by large and complex banking groups for which liquidation is not deemed appropriate.

On a weighted average basis, MREL requirements in the EU range between 26.5% of risk-weighted assets (RWAs) for the global systemically important institutions (G-SIIs) - the largest and most complex banks - and 19% of RWAs for the banks with total assets below €1bn that are neither G-SIIs nor other systemically important institutions (O-SIIs). Overall, MREL levels are reflective of banks’ going-concern requirements; in the case of transfer strategies, MREL levels also reflect the scaling down of MREL based on the transfer perimeter.

105 banks out of 222 sample already meet their requirement while the rest reported an estimated MREL shortfall of €178bn. While this is significant, it is worth noting that 65 of those banks with shortfalls also report instruments totalling €67bn that are close in nature to MREL but not eligible. This shows that some banks already have a sophisticated investor base, likely to invest in long-term unsecured debt such as MREL eligible instruments.

In the light of these shortfalls, the EBA encourages European resolution groups to take advantage of the current positive market conditions to issue and build up resources. As pointed out in the recent EBA risk assessment report, despite continued volatility, spreads for all market instrument have been on a downward trend for most of 2019, with spreads between secured and unsecured as well as between senior and subordinated instruments narrowing.

The EBA report is based on data provided by resolution authorities and covers the actual population of banks covered by an MREL decision, the actual level of this requirement and the level of resources effectively eligible in the relevant jurisdictions.


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