SRB updates its guidance on Bail-in Playbooks, data requirements and MREL
New requirements in the context of resolution planning for banks
New requirements in the context of resolution planning for banks
The update of SRB’s Operational Guidance on Bail-in Playbooks, new data requirements and an amended MREL Policy details new requirements in the context of resolution planning for banks.
On June 15th, 2022 the Single Resolution Board (SRB) published its updated approach to setting a Minimum Requirements for Own Funds and Eligible Liabilities (MREL) as well as its updated Operational Guidance on Bail-in implementation. In addition, the updated SRB Bail-in Data Set defines several new data points whereas some others were removed. The amendments do not represent fundamental changes, but detail additional expectations for banks that need to be addressed.
Bail-in Playbook
The most significant changes in this updated version of the SRB’s Operational Guidance for Bail-in Playbooks are the following:
(1) Internal loss transfer mechanism
Under a Single Point of Entry (SPE) approach only the resolution entity, i.e. the parent company, will be the direct target of resolution power whereas operational subsidiaries (non-resolution entities) are preserved and would not be subject to resolution themselves. The SPE approach relies on the upstreaming of losses to the parent and the downstreaming of capital to a failing subsidiary. The prepositioning of internal MREL is a key mechanism for facilitating this process. The Operational Guidance on Bail-in Playbooks 2022 now requires the internal loss transfer to be assessed and described in detail.
The Bail-in Playbook should be supplemented with details on the units in charge, processes, timelines, and the internal decision-making processes for the execution of the write-down and conversion powers at the level of the so-called Point of Entry (PoE) and a map as well as a description of existing financial support arrangements to conclude whether these could be used in resolution. Those requirements will be gradually extended to subsidiaries in the future.
In addition, the Bail-in Playbook should detail the following aspects by end of 2023, which marks the deadline of the phase-in of the Expectations for Banks (EfB):
- Sequence of events for the loss transfer mechanism operationalisation, including IT systems, time and units involved in resolution
- Operational, accounting, prudential and tax treatment of the loss transfer mechanism
- Potential legal, operational, and regulatory obstacles that hinder capital transferability
- Extent to which loss up- / down streaming mechanisms in place can be relied upon by the National Resolution Authority (NRA) in resolution
- Sequence of events to trigger the applicable guarantees for subsidiaries for which internal MREL waivers are in place or for which the internal MREL requirement is met with guarantees
- Governance arrangements, communication requirements and disclosure obligations
- MIS capabilities for the transfer of losses, ensuring capital transferability and data provision
At a minimum, these above-described elements should comprise the identification of the parties to the arrangement, provisions supporting the transfer mechanisms, potential termination clauses and (potential) obstacles to the execution / enforceability of the loss transfer mechanism.
(2) External Execution
The Bail-in Playbook should be supplemented with details on the steps necessary to ensure that the outcome of a possible definitive valuation is adequately reflected in the books of the relevant Central Securities Depositories (CSDs). Moreover, the Playbook should detail any discrepancies that could be caused by de-synchronised operations at different CSDs and how alignment can be ensured.
(3) Bail-in testing
The updated guidance sets out the requirements for performing dry-runs taking into account:
- Objectives and scope
- Testing methodology
- Dry-run components:
- MIS capabilities (SRB’s Valuation- and Bail-in Data Set)
- Internal execution
- External execution
- Governance and crisis management
- Communication
The above-described elements of dry-runs were already communicated in the SRB’s 2022 Working Priorities Letter and elaborated in more detail in separate IRT workshops. Moreover, a dry-run scenario was added including assumptions that banks should rely on:
- Write down and conversion shall first be applied to outstanding own funds instruments on a pro-rata basis in each own fund class (CET1, AT1, T2) and then follow the order of the creditor hierarchy under the insolvency law applicable
- Losses shall occur at the level of the resolution entity or in a subsidiary
- Reference date shall be the closest date to the dry-run
- Total losses shall equal minimum capital requirements of the resolution entity. The recapitalization action should lead to meeting the bank’s own funds requirement before resolution, both on a consolidated and on an individual basis.
- CET1 items other than capital instruments and share premium accounts shall unrestrictedly absorb losses before write-down and conversion powers are applied
- The application of a balance sheet depletion effect is possible if aligned with the IRT
- To the extent that losses cannot be absorbed by outstanding ownership instruments, these instruments should be cancelled and new ownership instruments pertaining only to a single hierarchy class (eg CET1 instruments) should be issued to bailed-in creditors
Bail-in Data Set
A new subsection on data points for derivatives was added (11 new data points). Some existing data points were deleted and, in some cases the data point attributes and definitions were changed.
Moreover, further specifications of the format of data provision in the context of bail-in testing are provided.
In addition, data points for the non-resolution entities were added (53 new data points) to address the internal loss transfer mechanism and recapitalization mechanism in a comprehensive manner.
MREL
With respect to leverage based MREL, the SRB will re-calibrate the final MREL targets based on the leverage amount including central bank exposures during the 2022 Resolution Planning Cycle (RPC). Moreover, the monitoring of compliance with the build-up towards the final MREL targets will take this into consideration.
Regarding the treatment of Multi Points of Entry (MPE) groups and the add-on related to exposures to resolution groups based in third countries, the SRB will align its transitional approach to the final legislative outcome of the published legislative proposal of the European Commission. This proposal clarifies that surpluses located in countries which have not adopted a resolution framework (equivalent to internationally agreed standards) cannot form a basis for reducing the requirement for the resolution group of the EU entity.
From the 2022 RPC onwards, the SRB will take into consideration the evolution of the bank’s balance sheet approaching failure in its assessment of the NCWO risk. The SRB’s NCWO methodology will take into account that, during the run-up to resolution phase, parts of the short-term unsecured funding will be potentially withdrawn and replaced by secured liabilities. Consequently, the share of liabilities excluded from the bail-in might increase, leading to a potential increase of NCWO risk for those entities where the outflows stem mainly from senior liabilities that are bail-in eligible.
The scope of subsidiaries for which the SRB will set internal MREL was updated. The previous threshold to qualify as a Relevant Legal Entity (RLE) of 3% of the resolution group’s total risk exposure amount, or leverage exposure, or total operating income was reduced to 2%. In addition, the updated policy added that entities with total assets exceeding EUR 10bn are also qualified as RLEs.
New complementary information on internal MREL waivers provides additional information on the SRB’s assessment of the free transferability of funds in a resolution scenario, as well as the documents that banks are expected to submit. The updated policy details eight specific criteria applied for the SRB’s assessment as well as a list of documents expected to be submitted when applying for a waiver.
