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The Daisy Chains directive sets out the concept and scope of liquidation entities and provides the conditions for the application of the consolidated treatment of ‘internal MREL’.
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’. 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.
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 new rules aim 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 new rules introduce 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).
On this basis and as a rule, liquidation entities will not be obliged to comply with an MREL requirement, unless the resolution authority decides otherwise on a case-by-case basis for financial stability protection reasons. The own funds of these liquidation entities issued to the intermediate entities will not need to be deducted except when they represent a material share of the own funds and eligible liabilities of the intermediate entity.
This is the last step of the adoption procedure. The text will now be published in the Official Journal and enter into force 20 days later.