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The Bank Recovery and Resolution Directive (BRRD) requires the European Banking Authority (EBA) to submit to the European Commission a report with recommendations on the appropriate reference point for setting the target level for resolution financing arrangements, and in particular, whether ‘total liabilities' constitute a more appropriate basis than ‘covered deposits'.
Based on preliminary analysis and results, the EBA recommends in its report to change the base for the target level of the resolution financing arrangements to one of the options: ‘total liabilities (excluding own funds) less covered deposits' or ‘total liabilities (including own funds)' or ‘total liabilities (excluding own funds). The key arguments in favour of these options are their consistency with the regulatory framework and contributions methodology, and simplicity and transparency.
The EBA also believes it is crucial for the target level basis (based on total liabilities - with or without further exclusions) to capture all the institutions in the scope of the BRRD. In the case of total liabilities (excluding own funds) less covered deposits, the target level basis should accurately reflect the potential call on the resolution financing arrangements in case of a given failure.
The BRRD requires Member States to create industry funded resolution financing arrangements (informally called ‘resolution funds'). The resolution financing arrangements can be used to support the orderly resolution of an institution under the rules of the BRRD, once losses have been absorbed by creditors and shareholders. The BRRD requires a certain minimum target level for the resolution financing arrangement to be funded from the ex-ante contributions within ten years, by 31 December 2024. Currently, the target level is defined as 1% of the covered deposits in the Member State concerned. The overall level of the resolution financing arrangement is assumed to be constant irrespective of a change to the basis for calculating the target level. Given this assumption, the report further recommends that if the European Commission proposes to change the target level basis, it should also consider an appropriate ratio depending on that target level basis.
Comments to this consultation can be sent to the EBA by 2 September 2016. A public hearing will take place at the EBA premises on 16 August 2016 from 2pm to 4pm UK time.