Article 45 of the bank recovery and resolution directive (BRRD) has mandated the European Banking Authority (EBA) to deliver a report to the European Commission by the end of the year on how to harmonise bank capital structure. The report will serve as the basis for a proposal on the harmonised application of Europe’s post-crisis regulatory reform — Minimum Requirement for own Funds and Eligible Liabilities (MREL).
Halfway through this year, the EBA delivered an interim report on the progress of that final report, in which it made some provisional recommendations and asked for further comment from stakeholders.
In other words, the wheels of banking regulation move excruciatingly slowly.
The scope of the EBA’s report is broad and requires close attention, but it is evident that European member states are desperately seeking clarity on one key part of the study: what makes a bank debt instrument eligible or ineligible for MREL?
Europe’s authorities are hung up on the desire to achieve what the European Central Bank (ECB) described last week as “a common EU approach to the creditor hierarchy in bank insolvency and resolution”.
The theory is that, by harmonising the insolvency rankings of bank creditors across Europe, the resolution of cross-border banks would become easier, there would be less uncertainty for investors, and all issuers would operate on a level playing field.
But the dream of harmony is long dead, while further delay is unnecessary, leaving European banks in limbo.
Germany has already developed a statutory approach to achieving subordination, by passing a law to make all senior debt eligible for bail-in.
UK and Swiss banks, for their part, have long favoured a structural approach to the same problem, requiring financial institutions to issue senior bonds out of their holding companies, which are free of operational liabilities.
When the French pass Sapin II, a three-way fragmentation will be complete. Sapin II will provide the basis for a statutory approach to achieving subordination, allowing the country’s banks to print a third tier of senior debt ranking between tier two and ordinary senior bonds.
The best-case scenario now is that EU authorities come forward as quickly as possible to give member states guidance on which bank liabilities should be subordinated to which other categories of bank liabilities to be eligible for MREL, without specifying a single acceptable form of subordination — be it statutory, contractual or structural.
There is no reason such guidance cannot be given before the Commission has had time to deliberate on the EBA’s full and final MREL report.
Last week Elke König, chair of the European single resolution board, shed some light on the types of considerations still floating around in regulators’ minds.
Speaking at the Institute for International Finance annual membership meeting in Washington DC, she attacked the French approach to making senior debt bail- inable , saying the plan would take far too long to make banks safe.
But this is exactly the point being raised by the banks themselves. Under pressure by regulatory change, treasury teams want enough certainty to start detailed planning and get deals issued, rather than wait another year or more for another round of reports and recommendations.
There is less and less time for financial institutions to build towards their MREL target levels, and global systemically important banks (G-Sibs) are also having to move forward with plans to reach their total loss-absorbing capacity (TLAC) requirements.
European rules for MREL are indeed a mess, but the moment to tidy them up has passed. Banks need clarity today more than they need a common European approach in two years time.