Brussels ( Brussels Morning) – EU Council revises BRRD and SRMR, introducing targeted measures for ‘internal MREL,’ bolstering banking resilience and addressing sector challenges.
The European Council adopted a declaration that amends the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) to contain targeted proportionality conditions to the treatment of ‘internal MREL’ in bank resolution groups. The Daisy Chains directive puts out the concept and range of liquidation entities and supplies the conditions for the application of the consolidated treatment of ‘internal MREL’.
The BRRD mandates banks and other credit institutions based in the EU to meet a minimum condition for own funds and eligible liabilities (‘MREL’) to secure an effective and credible application of the bail-in tool. Negligence to meet MREL may negatively impact institutions’ loss absorption and recapitalisation ability and, ultimately, the overall significance of resolution.
Where an MREL instrument is disseminated by a subsidiary within a banking company and directly or indirectly subscribed by its parent organisation, it is directed to as ‘internal MREL’. The intermediate subsidiary must remove its holdings of internal MREL from its funds to secure the integrity and loss of absorbency of the MREL instruments.
New Laws to Avoid Disproportionate Impacts
After analysis, the Commission discovered that the application of the deduction provision on internal MREL could have a disproportionately harmful impact on certain banking group structures, namely those working under a parent holding company and individual operating company structures. The latest rules aim to give the resolution controls the power of setting internal MREL on a compact basis subject to certain conditions. Where the resolution authority permits a banking group to involve such consolidated treatment, the intermediate associates will not be obliged to subtract their holdings of internal MREL, thus controlling the detrimental effect identified by the Commission.
In addition, the new regulations introduce a specific MREL remedy for ‘liquidation entities’. Those are described as entities within a banking group dedicated to winding up under insolvency rules, which would, therefore, not be subject to resolution measures (conversion or write-down of MREL instruments). On these grounds and as a rule, liquidation entities will not be obliged to concede with an MREL requirement, unless the resolution authority determines otherwise on a case-by-case basis for economic stability protection reasons. The own funds of these liquidation entities allocated to the intermediate entities will not need to be deducted besides when they designate a material share of the own funds and eligible liabilities of the intermediate entity.
The amendments to the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) signify a strategic move towards ensuring the stability and resilience of the banking sector within the EU. By introducing targeted proportionality conditions for ‘internal MREL’ treatment, the new regulations aim to mitigate disproportionate impacts on certain banking group structures. The directive emphasizes the importance of meeting the Minimum Requirement for own funds and Eligible Liabilities (MREL) to uphold effective resolution mechanisms and safeguard financial stability. Through these measures, the EU seeks to bolster the integrity of its banking system while addressing the unique challenges posed by varying group structures and entities.
