The proposal is a targeted amendment of the Bank Recovery and Resolution Directive or (BRRD) and the Single Resolution Mechanism Regulation or (SRMR) to include targeted proportionality requirements to the treatment of ‘internal MREL’ in bank resolution groups.
The Council and the European Parliament today reached a provisional political agreement on the Daisy Chains proposal. The proposal is a targeted amendment of the Bank Recovery and Resolution Directive or (BRRD) and the Single Resolution Mechanism Regulation or (SRMR) to include targeted proportionality requirements to the treatment of ‘internal MREL’ in bank resolution groups.
Effective resolution
The BRRD requires banks and other credit institutions established in the EU to meet a minimum requirement for own funds and eligible liabilities (‘MREL’) to ensure an effective and credible application of the bail-in tool. Failure to meet MREL may negatively impact institutions' loss absorption and recapitalisation capacity and, ultimately, the overall effectiveness of resolution.
Where an MREL instrument is issued by a subsidiary within a banking group and directly or indirectly subscribed by its parent company, it is referred to as ‘internal MREL’. Under indirect subscription, the intermediate subsidiary must deduct its holdings of internal MREL from its own funds to ensure the integrity and loss absorbency of the MREL instruments.
New rules to avoid disproportionate effects
After analysis, the Commission found that the application of the deduction requirement on internal MREL could have a disproportionate detrimental impact for certain banking group structures, namely those operating under a parent holding company and certain operating company structures.
The Daisy Chains proposal aims to give the resolution authorities the power of setting internal MREL on a consolidated basis subject to certain conditions. Where the resolution authority allows a banking group to apply such consolidated treatment, the intermediate subsidiaries will not be obliged to deduct their individual holdings of internal MREL, thus preventing the detrimental effect identified by the Commission.
In addition, the proposal introduces a specific MREL treatment for ‘liquidation entities’. Those are defined as entities within a banking group earmarked for winding-up in accordance with insolvency laws, which would, therefore, not be subject to resolution action (conversion or write-down of MREL instruments).
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