General approach of the Czech National Bank to setting a minimum requirement for own funds and eligible liabilities (MREL)
Among the main resolution objectives, the framework of which is laid down by the Directive 2014/59/EU (BRRD)1, is to ensure the continuity of critical functions, to avoid adverse effects on financial stability, to protect public funds by minimising reliance on extraordinary public financial support to failing institutions and to protect covered depositors, investors, client funds and client assets.
Effective resolution in line with these objectives can only be feasible and credible if adequate internal financial resources are available to an institution or group to absorb losses and for recapitalisation purposes. In order to maintain transparency and inform the institutions and the professional public, this communication outlines the Czech National Bank’s general approach to setting the minimum requirement for own funds and eligible liabilities (MREL) under Article 127 et seq. of the Recovery and Resolution Act2.
General approach of the CNB is in line with the BRRD and complies with the applicable provisions of the Recovery and Resolution Act and European Commission Delegated Regulation (EU) 2016/14503. The CNB will also consider the Financial Stability Board’s total loss-absorbing capacity standard (FSB TLAC standard4) and the prospective revision of the BRRD and CRD IV5/CRR6.
The CNB will set MREL for all institutions and other relevant persons on an individual and, where relevant, consolidated basis from 2019. By doing so, the CNB will make a significant contribution to the resolvability of Czech banks.
MREL is an institution-specific requirement, and the CNB will set MREL so that institutions and groups can be resolved consistently with the resolution objectives under the preferred resolution strategy.
This communication describes the approach that the CNB will use when setting MREL for complex systemic institutions and groups providing multiple critical economic functions, where the “ open-bank bail-in” is considered the preferred resolution strategy. However, it does not set any given relevant person’s MREL.
In this light, the CNB will set the minimum requirement for capital and eligible liabilities as the sum of the loss absorption amount (“LAA”) and the recapitalisation amount (“RCA”) :
- Loss absorption amount: The capacity to absorb losses will be closely linked to the institution’s current capital requirements (Pillar 1 (P1) and Pillar 2 (P2)) as set by the CNB as the National Competent Authority;
- Recapitalisation amount: The capacity to restore capital will be closely linked to likely capital requirements after the application of the resolution strategy (P1 and P2) so that the institution or group can be recapitalised to the level necessary to satisfy applicable capital requirements to comply with the conditions for authorisation as well as any additional amount that the resolution authority considers necessary to maintain sufficient market confidence after resolution.
Any applicable combined buffer requirement (“CBR”) is reflected neither in the default loss absorption nor in the recapitalization amount (i.e. “stacking order approach”). In line with the above, institutions and groups must ensure that the part of the capital buffers that sits above both the LAA and the RCA remains usable. Accordingly, Common Equity Tier 1 used to meet the MREL may not be used to also meet the combined buffer requirements.
Schematically, the general approach of the CNB to setting MREL is illustrated as follows:
MREL in specific cases
When the resolution plan foresees the use of resolution tools other than bail-in, e.g. sale of a business (alternatively the “bridge bank tool”)7, the recapitalisation amount of MREL will generally be lower. This will allow for the absorption of losses and recapitalisation reflecting the preferred strategy and tool. The part of the institution to be transferred will depend mainly on the range of critical functions provided.
Where the resolvability assessment concludes that liquidation of an institution or group under normal insolvency or winding-up proceedings is both feasible and credible, no recapitalisation amount will be set unless the CNB determines that a positive amount is necessary on the grounds that liquidation would not achieve the resolution objectives to the same extent as an alternative resolution strategy.
The requirement may be met with own funds (capital) and eligible liabilities, as defined in the applicable legislation. At the time of publication of this general approach, the CNB does not further specify detailed characteristics of the instruments that may be used to fulfil the requirement (e.g. subordination, instrument eligibility, cross-holdings, etc.).
The CNB expects to set the first minimum requirements for own funds and eligible liabilities during 2019 and communicate these to the institutions. The MREL requirement may also be set as indicative. If a potential MREL shortfall is identified, the CNB will set an adequate transition period to meet the final requirement. Given the robustness and structure of the Czech banking sector the Czech National Bank does not generally intend to go beyond the MREL requirement, except for specific situations.
The CNB reserves the right to modify this general approach to reflect the specific situation of each individual institution or group. In addition, this general approach may be revised in light of changes in the regulatory environment, such as the proposed revision of the BRRD and CRR/CRD.
1 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council
2 Act No. 374/2015 Coll., on recovery and resolution in the financial market
3 Commission Delegated Regulation (EU) 2016/1450 of 23 May 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities
5 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC
6 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012
7 This is relevant mainly to less complex institutions and groups providing a limited number of critical economic functions.