Eligible Liabilities Research Articles

Law and discretion in monetary policy and in the banking union: Complexity between high politics and administration

The controversy over the degree of judicial review of monetary policy decisions triggered by the contrasting Weiss judgments of the German Federal Constitutional Court and of the Court of Justice of the European Union invites an inquiry into the role of law in areas characterized by a high degree of political and technical complexity. This article singles out the structural conditions that qualify complexity in specific instances of decision-making: prognostic assessments, goal-oriented decisions, marked by uncertainty, legal indeterminacy, and discretion. These traits characterize both monetary policy decisions and some regulatory decisions taken within the banking union, such as the setting of minimum requirements for own funds and eligible liabilities (MREL) and the calculation of the leverage ratios of credit institutions (Livret A judgments). Irrespective of the very distinct formal-institutional legal frameworks of these two policy fields, in those conditions legality may be determined by the discretionary choices of the decision-maker. For this reason, they impact the court’s deployment of legal principles, namely proportionality and careful and impartial examination. This cross-sector comparison sheds light on the relative specificity of monetary policy, and leads to rejecting the transposition of a distinction between “high politics” and “ordinary administration” to EU law, as a means of both explaining and guiding different degrees of judicial review in conditions of complexity. The different constitutional relevance of monetary policy decisions and of “ordinary” banking supervision requires not a distinction that can rationalize judicial review, but a full consideration of the role that the law must have in supporting non-judicial accountability. judicial review of administrative discretion, complex technical and economic assessments, monetary policy, proportionality, banking union, principle of careful and impartial examination

The reform of the crisis management and deposit insurance framework: An overview

Abstract The Crisis Management and Deposit Insurance (CMDI) legal framework brought important benefits in terms of protecting financial stability while avoiding contagion, safeguarding the functioning of the single market, minimising recourse to taxpayers money, significantly improving depositor protection and contributing to boosting consumers’ confidence in the EU banking sector. However, according to the European Commission, it could be further improved especially with regard to smaller and medium-sized banks. This article presents an overview of the European Commission’s legislative proposals addressing those shortcomings and aimed at strengthening the CMDI legal framework, which was presented in April 2023. The core part of this reform is made up of three legislative proposals amending the Bank Recovery and Resolution Directive (Directive 2014/59/EU), the Single Resolution Mechanism Regulation (Regulation 806/2014) and the Deposit Guarantee Schemes Directive (Directive 2014/49/EU). The fourth legislative proposal, would amend the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation with regard to targeted provisions on minimum requirement for own funds and eligible liabilities.

Overlaps between minimum requirements and capital buffers: the usability of the combined buffer requirement for Italian banks

The current EU capital regulation requires that banks comply with two main frameworks at the same time: one for prudential purposes, the other for resolution purposes. The first one includes both a risk-weighted requirement (RW) and a leverage ratio requirement (LR). Similarly, the resolution framework, which ensures that banks have enough loss-absorbing and recapitalization capacity through a Minimum Requirement of Eligible Liabilities (MREL), is based on two ratios that are to be met in parallel: the MREL as a percentage of risk weighted assets (MREL-RW) and the MREL as a percentage of the total exposure measure used for the purpose of the leverage ratio (MREL-LR). According to the EU regulation, the CBR is only required on top of the two risk-weighted requirements (RW and MREL-RW).

Go Preventive or Go Home – The Double Nature of MREL

Abstract Bank Resolution is considered a cornerstone of the post-crisis financial regulation; however, it is also widely considered ineffective and inefficient in handling bank failures. This article analyses the preventive potential of the resolution framework, specifically focusing on the minimum requirement for own funds and eligible liabilities (MREL). We argue that MREL has a double nature. On the one hand, it should ensure the feasibility of resolution in case of a bank failure. On the other hand, it aims at restricting the funding model of banks, similarly to the other (preventive) capital requirements. By analysing the 2019 reform of the EU banking regulation, we contend that MREL represents an important complement to the rest of the preventive regulatory framework and that the latest reform unleashes such potential. We demonstrate that the new rules on MREL determination and enforcement allow the resolution authority to look after the build-up of systemic risk. The analysis reveals that MREL can serve both micro- and macro-prudential purposes. Finally, we argue that the current institutional architecture represents the main impeding factor for the new regulation to efficiently work, curbing the positive preventive potential of MREL.

Stillborn Banking Union: Explaining Ineffective European Union Bank Resolution Rules†

AbstractOur contribution demonstrates and explains the ineffectiveness of European Union (EU) bank resolution rules, a core element of Banking Union. This inadequacy owes in large part to the limited access to and insufficient availability of EU resolution funds and inadequate national deposit guarantee schemes in most EU member states, in conjunction with the relatively high minimum requirements for own funds and eligible liabilities (MREL) for many EU banks. In many cases, these requirements are unlikely ever to be met – particularly for retail banks most likely to require resolution in the euro periphery. We offer a liberal intergovernmentalist analysis to explain the inadequacy of the EU resolution regime by examining German and French government preferences on EU rules on bank capital requirements agreed earlier in 2013 and national deposit guarantee schemes agreed in 2014. These government preferences were shaped significantly by the preferences of national banks and bank associations.

Misselling in Self-placement and Bank Resolution under BRRD2

Abstract1. Bank crises and the treatment of retail investors in the BRRD era. – 2. The problem of misselling in the context of self-placement of securities issued by banks. – 3. The (loose) interplay between investor protection and bank resolution in the current regulatory environment. – 4. The Single Resolution Board’s policy on the treatment of retail clients’ holdings for the purpose of MREL eligibility. – 5. Art. 44 a BRRD 2 on the «selling of subordinated eligible liabilities to retail clients». – 6. The need for a more effective integration between investor protection and bank resolution discipline: from an ex-post to an ex-ante approach. The role of product governance under MiFID 2. – 7. Concluding remarks.

What Are the Determinants of Mrel- Eligible Debt Yields? Evidence From the EU Banking Sector

We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)‐eligible debt yields in a sample of 63 European banking groups during the period 2009Q3–2019Q2 in 14 European countries. We conclude that MREL‐eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL‐eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and non‐ systemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particularregarding bank and marketrisk variables. Our model also suggests that investors closely monitor senior non‐preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non‐preferred issuances. Credit ratings are seen as a high‐credibility tool, helping investors in the market to better exercise market discipline.

The MREL Framework Under the Banking Reform Package

The adoption of the “Banking Reform Package” (CRR2, CRD4, BRRD2, SRMR2) in 2019 led to material changes, among others, in the regulatory framework governing the Minimum Requirement for Own funds and Eligible Liabilities (MREL). The revised framework aimed at introducing the rules adopted by the Financial Stability Board (FSB) on the Total Loss-Absorbing Capacity (TLAC) to the Union law and addressing the deficiencies of the former framework. As regards the novelties brought in by the new framework, the most significant one pertains to the introduction of a minimum and fixed requirement (Pillar 1 MREL) for Global Systemically Important Banks (G-SIBs) and other large banks. At the same time, all banks are still subject to the bank-specific requirement (Pillar 2 MREL) for which no material amendment in the determination approach is introduced in the revised framework. In practice, the MREL target that banks must meet is the higher of the Pillar 1 MREL and the bank-specific Pillar 2 MREL. Other key elements of the revised framework are related to the obligation for banks to cover a significant part of the MREL with instruments subordinated to liabilities excluded (or likely to be excluded) from bail-in (subordination requirement), the introduction of the internal MREL for subsidiaries of resolution entities and the establishment of harmonized criteria for MREL-eligible liabilities. Furthermore, the revised rules clarify several aspects of the former framework, including the deadline for banks to meet the MREL, the redemption of MREL-eligible liabilities and the measures to address a breach of the MREL. The present paper analyses the aforementioned key elements of the revised MREL framework and assesses its conformity with the TLAC standard, as well as the implications that may arise as a result of its complexity and the discretions provided to resolution authorities. As regards the first point, the analysis indicates that the transposition of the TLAC rules into the Union law not only achieves the target of conformity, but also in some cases the MREL extends beyond the scope and the level required under the international standard. In relation to the nature of the requirement, the MREL framework is characterized by a significant degree of complexity and the discretionary powers assigned upon resolution authorities. Excluding the Pillar 1 MREL applicable to G-SIBs and “top-tier banks”, there is no other single MREL-related requirement that is clear about which banks it applies to and what the level thereof is. All other requirements are subject to decisions taken by resolution authorities, mostly based on unclear criteria. Hence, resolution authorities have extensive powers to decide on the scope of requirements (e.g. Pillar 1 MREL, Pillar 2 MREL, subordination requirement, internal MREL) and other critical aspects (e.g. transitional period for Pillar 2 MREL, redemption of MREL-eligible liabilities, measures to address a breach of the MREL). The discretionary character of the framework allows resolution authorities to translate the MREL rules into their policies in a different way resulting in a divergent application of the MREL across the EU. In addition, discretions foster ambiguity regarding the requirements that banks are obliged to meet, even if they are under the remit of the same resolution authority. As a result, these arrangements cause uncertainty to both banks and investors over the applicable requirements, the MREL needs and the resources required to meet those needs.

Resolution of banks: What kind of scenarios to enhance the credibility and the feasibility of resolution strategies

A resolution strategy for banks needs to be feasible and credible. Asking banks to work on their resolvability is a major issue and therefore the resolution strategy developed by the authorities needs addressing the scenarios that are most likely to materialise and lead the institution to resolution. The aspects to be considered are the speed of the scenarios, the liquidity risk to be faced rather a solvency one, the consideration of systemic and idiosyncratic shocks and the perimeter of the resolution group. Based on the experience, there is a need to improve resolution planning and selection of the most adequate resolution strategies. This should cover the range of scenarios considered in resolution planning that has to be broadened in, how to better take into account recovery options in resolution planning and Minimum Requirement for Own Funds and Eligible Liabilities setting, how to consider systemic scenarios in the preliminary public interest assessment and finally what should be the perimeter of the resolution group. While resolution planning has made very good progress as resolution regimes have been established, taking into account those points will be major improvements.

Potential Regulatory Obstacles to Crossborder Mergers and Acquisitions in the EU Banking Sector

Over the past decade, cross-border merger and acquisition (M&A) activity in the EU banking sector has remained far below its pre-crisis levels, despite the regulatory reforms implemented after the financial crisis. While the EU equipped itself with the Single Rulebook, convergent supervisory practices, a common crisis management framework and the creation of the Banking Union, ring-fencing and limits to the circulation of funds across borders are still present and the EU still does not reap the full benefits of the Single Market. The purpose of this paper is to map and analyse the elements of the current EU prudential framework that create obstacles to banking groups operating across borders. The results highlight the existence of a number of potential issues at both regulatory and supervisory levels. First, policy reviews, cases and survey-based evidence suggest that the current regulatory framework relies on a territorial approach (cross-border waivers for capital and minimum requirements for own funds and eligible liabilities (MREL), inefficient intra-group financial support arrangements, a multiplicity of macroprudential tools and the existence of options and national discretions within the Single Rulebook), favours pre-positioning resources with the subsidiaries and entails market fragmentation. Ultimately, this may endanger the comparability of institutions across countries and reduce the incentive to conduct cross-border consolidation. Second, despite the progress made in achieving convergence of supervisory practices across the EU, a number of approaches are not yet fully consistent, in particular with respect to the link between prudential requirements and restrictions on distributions, and to a more transparent approach when setting risk-by-risk requirements. The absence of common and fully transparent EU practices for prudential assessment of M&A transactions, including the determination of capital requirements, further adds to the complexity. Finally, it is also suggested that the completion of the Banking Union, by further strengthening the institutional cooperation among Member States and national authorities, has a fundamental role to play in freeing up the potential of enhanced financial integration. There should also be no further delay in the progress made towards the Banking Union’s achievement of single jurisdiction status.

Go Preventive or Go Home - A New Role of MREL

Bank Resolution is considered a cornerstone of the post-crisis financial regulation; however, it is also widely considered ineffective and inefficient in handling bank failures. This article analyses the preventive potential of the resolution framework, specifically focusing on the minimum requirement for own funds and eligible liabilities (MREL). We argue that MREL has a double nature. On the one hand, it should ensure the feasibility of resolution in case of a bank failure. On the other hand, it aims at restricting the funding model of banks, similarly to the other (preventive) capital requirements. By analysing the 2019 reform of the EU banking regulation, we contend that MREL represents an important complement to the rest of the preventive regulatory framework and that the latest reform unleashes such potential. We demonstrate that the new rules on MREL determination and enforcement allows the resolution authority to look after the build-up of systemic risk. The analysis reveals that MREL can serve both micro- and macro-prudential purposes. Finally, we argue that the current institutional architecture represents the main impeding factor for the new regulation to efficiently work, curbing the positive preventive potential of MREL.

Total loss-absorbing capacity and minimum requirement for own funds and eligible liabilities: Impact of bail-in rules on balance sheet management and funding

This paper looks at the impact of the new resolution regime, especially the bail-in tools, on balance sheet management and the implications for internal liquidity risk management as well as funding. Minimum Requirement for own funds and Eligible Liabilities (MREL) and total loss-absorbing capacity (TLAC) should be key indicators for total bank management. Due to costintensity, the paper advises optimising the balance sheet structure and the resolution strategy. A prudent funding strategy has to find a balance between the firm-specific funding capacity, continuous market access and limiting costs. The paper also looks at an efficient way to allocate the specific costs within the bank.

Why MREL won’t help much: minimum requirements for bail-in capital as an insufficient remedy for defunct private sector involvement under the European bank resolution framework

The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remove the impediments to the desirable incentive effect of private sector involvement (PSI) emanating from a lack of predictability of outcomes, if it compels banks to issue a sufficient minimum of high-quality, easy-to-bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects. The main problem, echoing the general concerns scholars voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus fail to fully alleviate the predicament of investors in bail-in debt. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to correctly gauge the relevant risk of PSI in a bank’s failure at the time of purchase, subsequent adjustments of MREL prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions, and the market discipline that follows from them may prove inadequate and the policy objectives of the regulatory intervention may be missed. The pending European legislation aims to implement the already complex specifications of the Financial Stability Board for Total Loss-Absorbing Capacity (TLAC) by making very detailed and case-specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. Omitted from this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is barely conceivable that the pricing of MREL instruments reflects an accurate risk assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this paper looks in detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework. It concludes with policy recommendations based on the prior analysis.

The Evolution of Banking Regulation Since the Financial Crisis: A Critical Assessment

Following the 2008 financial crisis a major process of regulatory reform of the banking industry took place with the aim of increasing the resilience of the financial system. More specifically, the regulatory changes introduced after the financial crisis were aimed at pursuing three main objectives: (i) improve the resilience of individual banks, thereby reducing the risk of financial institutions to fail, (ii) improve the resilience of the financial system as a whole, limiting the risk of spillovers to the broader economy that would be triggered by the failure of large financial institutions, and (iii) reduce the risk for taxpayers to bear the cost of future banking crisis. Starting from an exam of the main weaknesses of the banking regulatory framework highlighted by the financial crisis, this paper provides a detailed analysis of the Basel 3 reform, its main goals, timing and technical features. It then examines the more recent revisions of the Basel 3 framework - often called “Basel 4” - and the new requirements associated to bank resolution policies, i.e. the “total loss absorbing capacity” (TLAC) and the “minimum required eligible liabilities” (MREL). These regulatory reforms are then critically discussed, both though the analysis of their impact on the banking industry, and with recourse to the available empirical evidence. This evidence shows that the banking industry did register a significant increase in the amount and quality of equity capital, mostly achieved through capital increases, and in liquidity. This led to a decrease in the probability of future large banks defaults and in the incentive for banks to take on excessive risks. Also, by introducing bail in mechanisms for banks’ liabilities, these reforms reduced the likelihood of future crisis being supported by taxpayers via government bail outs. However, a number of threats are still being faced by the banking industry. These include profitability, a necessary condition for a bank to be sustainable over time, the sovereign-banks “doom loop”, and the possibility of future recessions, as banks’ safety and soundness is inevitably linked to the state of the economy.

Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime

This article analyses the bail-in tool under the European Bank Recovery and Resolution Directive (BRRD) and predicts that it will not reach its policy objective. To make this argument, this article first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process which entails ample discretion of the authorities also in forcing PSI. Moreover, the idea that nearly all positions on the liability side of a bank’s balance sheet should be subjected to bail-in is misguided. Instead, a concentration of PSI in instruments that fall under the minimum requirements for own funds and eligible liabilities (MREL) is preferable. Finally, this article synthesizes the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle PSI as a precondition for effective bank-resolution as much as possible from the resolution process as such.

Ending Too-Big-To-Fail: Progress Since the Crisis, the Importance of Loss-Absorbing Capacity and the UK Approach to Resolution

In 2008 the largest cross-border banks were too big to fail and had to be bailed out, inappropriately penalising taxpayers and rewarding bank investors. This paper reviews the major progress since then in seeking to end ‘too-big-to-fail’. This has involved several strands: the development of resolution regimes; the negotiation and agreement of cooperative resolution strategies for global systemically-important banks (G-SIBs); the identification of barriers to resolvability; and paving the way to removing those barriers. A crucial aspect of this is requiring all banks to have sufficient loss-absorbing capacity to ensure their orderly resolution. Following adoption by the G20 of the Financial Stability Board’s standard on total loss-absorbing capacity (TLAC), the UK authorities have recently published their policy on TLAC and its Bank Recovery and Resolution Directive equivalent Minimum Requirement for Own Funds and Eligible Liabilities (MREL)—the minimum requirement for own funds and eligible liabilities. The provisions link both the quantum and quality of TLAC or MREL resources to the preferred resolution strategy, whether that is bail-in, partial transfer or liquidation, on a case-by-case basis. This ensures that a one-size-fits-all approach is not taken to resolution of different types of bank. The UK rules also provide a degree of flexibility to UK banks in meeting their MRELs, both by specifying appropriate transitional arrangements and by making the final requirements subject to review by the UK authorities. This will take into account any changes to the UK regulatory environment in coming years and the actual experience of UK banks in raising loss-absorbing resources.

MREL and TLAC: The Path from Bail-out to Bail-in for Banks' Creditors in the European Union

Abstract In the wake of the financial market crisis new rules on banking recovery and resolution of systemic banks have been enacted in order to facilitate the bail-in of banks' creditors. Banks will be required to maintain sufficient amounts of own funds and bail-inable debt called Minimum Requirement for own funds and Eligible Liabilities (MREL) or Total Loss-Absorbing Capacity (TLAC) respectively. Hence even more competing norms exist in parallel most of which aim to correct the results of banks' internal models which have often times underestimated risks. Because the multitude of new and existing rules overlap, reducing unnecessary complexity is needed and can be accomplished without changing capital and MREL requirements overall. A pro-forma analysis relating to a sample of 23 systemically important banks in the European Union support this view. Durch MREL und TLAC vom Bail-out zum Bail-in der Bankenglaubiger in der Europaischen Union Zusammenfassung Infolge der Finanzmarktkrise wurden Regeln zur San...

Why MREL Won't Help Much

The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remove the impediments to the desirable incentive effect of private sector involvement (PSI) emanating from a lack of predictability of outcomes, if it compels banks to issue a sufficient minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects. The main problem, echoing the general concerns scholars voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus fail to fully alleviate the predicament of investors in bail-in debt. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to correctly gauge the relevant risk of PSI in a bank’s failure at the time of purchase, subsequent adjustments of MREL prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions, and the market discipline that follows from them may prove inadequate and so may. The pending European legislation aims to implement the already complex specifications of the Financial Stability Board (FSB) for Total Loss-Absorbing Capacity (TLAC) by making very detailed and case-specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. Omitted from this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is barely conceivable that the pricing of MREL instruments reflects an accurate risk assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this paper looks in detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework. It concludes with policy recommendations based on the prior analysis.

Too Complex to Work: A Critical Assessment of the Bail-In Tool Under the European Bank Recovery and Resolution Regime

This paper analyzes the bail-in tool under the BRRD and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis, the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process, which entails ample discretion of the authorities also in forcing private sector involvement. Moreover, the idea that nearly all positions on the liability side of a bank’s balance sheet should be subjected to bail-in is misguided. Instead, a concentration of PSI in instruments that fall under the minimum requirements for own funds and eligible liabilities (MREL) is preferable. Finally, this paper synthesized the prior analysis by putting forward an alter-native regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible form the resolution process as such.

국제 기준의 채권자손실분담제도의 한국 내 입법 방안: 베일인 대상 채권의 구체화 및 법적 타당성을 중심으로

국제 기준의 채권자손실분담제도의 한국 내 입법 방안: 베일인 대상 채권의 구체화 및 법적 타당성을 중심으로