06 March 2020

AFME comments on SRB policy under the banking package consultation

AFME highlights:

• Transitional arrangements: Whilst AFME recognises the level one text requiring a linear build-up of MREL up to the 2024 compliance deadline, AFME believes the SRB’s stance with regard to institutions already meeting MREL requirements to be disproportionate. In particular, setting the end-state MREL level as the current required target penalises those institutions that have sought to meet MREL levels sooner. This may hamper these institutions unnecessarily if they were to seek any redemption of MREL.
• Eligibility of liabilities issued under third country law: It is very important to clarify the policy regarding the impact of the changes to Article 55 BRRD on existing Additional Tier 1 (AT1) and Tier 2 (T2) instruments. In particular it is important to emphasise that the amended provisions only apply to liabilities issued or entered into after the date of application under Article 55(1)(d). While reference is made to this in a footnote stating that liabilities issued before the date referenced would not be impacted, AFME is concerned that this is not sufficiently clear and could be missed by investors.
• Calibration – identification of ‘Resolution Groups’: While the policy is clear in its definition of Resolution Group, AFME understands that many, if not all, institutions under the SRB’s remit are still yet to have formal confirmation of the Resolution Group(s) within their bank. It is essential that this is confirmed as a matter of urgency, as a number of requirements clearly flow from the determination including the location and calibration of MREL, but also more broadly in the implementation of the SRB’s Expectations for Banks and aligning capabilities that banks are building up to enhance resolvability with the SRB’s preferred resolution plan.
• NCWO risk tool: AFME strongly supports the SRB’s intention to apply a quantitative tool to assess NCWO risk. However, AFME deems it key:
  • to get full disclosure on the methodology underlying such a tool, in order to allow banks to run internal simulations of possible outcomes to help improve their resolvability. AFME would recommend that the model itself is released in consultation with industry.
  • with respect to the quantitative inputs disclosed in the draft policy, AFME would like to have more clarity and explanation on the underlying rationale of the 0.25 price to book value for the shares resulting from the conversion of liabilities in resolution.
  • to understand how the new tool will interact with the existing approach. In these respects, AFME firmly opposes the automatic subordination add-ons which the policy makes reference to, but which it remains unclear if this practice will continue or not.
• Clarity on the application to material subsidiaries of third country resolution entities: It is important that the SRB clearly sets out its policy with respect to internal MREL for material subsidiaries of third country resolution entities established in the Banking Union. In finalising their policy AFME recommends that the SRB make reference to the FSB guiding principles on internal TLAC, and ensure that sufficient dialogue with home resolution authorities are considered as part of their approach.
• Enhanced clarity to support market understanding: Whilst the proposed SRB policy does provide further detail on the direction of travel for MREL calibration going forward, there remains areas of uncertainty. In particular there are aspects of the calibration and subordination approaches that do not give a clear indication of the approach the SRB will apply to specific types or sizes of entity, beyond that which is provided in the level one legislation.

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