Abstract
The Minimum Requirement of capital and Eligible Liabilities (MREL) concept ensures that a bank has enough capital and debt to ensure loss absorption and recapitalisation. It is fundamental, deceivingly simple and yet challenging to implement. First, since MREL depends on banks’ size, structure and business model, it may be a source of conflict between authorities’ powers and banks’ freedom of enterprise. Second, small banks have no easy access to capital markets to distribute MREL instruments, which may result in a disproportionate burden. Third, even if, from a resolution perspective, guaranteeing a smooth writing off of capital and debt instruments is essential, it may not seem such a good idea from investors’ standpoint. This chapter explores the MREL concept, its configuration and its potential for conflict.
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Notes
- 1.
It is worth noting that article 108 BRRD modifies domestic insolvency rules to ensure that eligible bank deposits rank high in the insolvency hierarchy (i.e. above ordinary liabilities) and thus reduces the friction between a resolution and an insolvency scenario. However, this does not happen with short-term liabilities, or liabilities of trade creditors that provide critical services.
- 2.
The English version of BRRD uses the more neutral verb “bear” in article 34, but “suffer” is used in recitals (55), (67) or (71), or articles 107 (3) or 109 (1) (b).
- 3.
Judgment 10 July 2012, ECtHR no. 34940/10.
- 4.
Judgment 19 July 2016 C-526/14.
- 5.
Judgment 8 November 2016 C-41/15.
- 6.
Judgment 20 September 2016 C-8/15.
- 7.
Judgment 10 July 2012, ECtHR no. 34940/10, cit., paras. 11, 21, 23.
- 8.
Ibid., para. 39.
- 9.
Ibid., para. 40.
- 10.
Ibid., para. 42.
- 11.
Judgment C-526/14, cit., paras. 63–66.
- 12.
Ibid., paras. 78–79.
- 13.
Ibid., para. 77.
- 14.
It is hard to see the property over a bank’s share/bond as something different from an expectation over payments, which depend on an expectation over the behaviour of the market and public authorities.
- 15.
Judgment C-526/14, cit., para. 62.
- 16.
Judgment 10 July 2012, ECtHR no. 34940/10, cit., para. 40 and judgment C-526/14, cit., paras. 74–75.
- 17.
Judgment C-41/15, cit., para. 50.
- 18.
Judgment 20 September 2016 C-105/15.
- 19.
The Court held that the acts of the ESM were its own, and subject to its privileges and immunities (falling outside EU Treaties). The Commission and ECB, however, could be held liable because, as EU institutions, they were always subject to the EU Treaties (including the Charter of Fundamental Rights) even when acting in an institution falling outside those Treaties.
- 20.
Judgement C-8/15, cit., paras. 73–74.
- 21.
Guarantees issued by a province/state could not retroactively be rendered invalid, even when the province is incapable of bearing the risk.
- 22.
Judgment 21 October 2003, ECtHR no. 29010/95.
- 23.
Judgment 24 November 2005, ECtHR no. 49429/99.
- 24.
Judgment 24 November 2005, ECtHR no. 49429/99, cit., paras. 27–33.
- 25.
Ibid., para. 58.
- 26.
Ibid., para. 134.
- 27.
Ibid., paras. 109, 135 and Judgment 21 October 2003, ECtHR no. 29010/95, cit., para. 69.
- 28.
Judgment 21 October 2003, ECtHR no. 29010/95, cit., paras. 69–70. A similar situation was recently echoed in the case law of the CJEU: the CJEU held that shareholders may have an interest in bringing proceedings (order of 12 September 2017, Trasta Komercbanka v. European Central Bank, T-247/16, para. 57) when the bank itself would not have standing. This was compounded by the fact that, according to the ECtHR’s findings, in the process of review envisaged in the procedural laws, “It is not the role of the courts to examine the substantive reasons for which the compulsory administration has been imposed or subsequently extended. Moreover, consistently with this limited role, the procedure before the court is exclusively written and takes place in private, without a hearing and without the possibility of opposition from the management of the bank.”
- 29.
Judgment 24 November 2005, ECtHR no. 49429/99, cit., paras. 105–109.
- 30.
Ibid., para. 113.
- 31.
Judgment 9 April 2015, ECtHR No. 47315/13.
- 32.
Ibid., para. 41.
- 33.
Ibid., para. 101.
- 34.
Ibid., para. 109.
- 35.
Portuguese authorities stated that the decision in the context of the resolution of Banco Espirito Santo (BES) to transfer assets to Novo Banco (“NB”, the bank where the “good assets” were transferred) did not include a loan facility subscribed by BES with Oak Finance Luxembourg. Since the loan facility included a jurisdiction clause in favour of English courts, the Commercial Court declared itself competent to decide on whether NB had succeeded, or not, BES in the loan facility, despite the previous decision by resolution authorities. About this case, see also Chap. 16, para. 1.
- 36.
The UK Court of Appeals relied on the broader interpretation of “reorganisation measures” under art 2 of Directive 2001/24 laid out in the Kotnik decision.
- 37.
TLAC requirements are the greater between a 16% of risk-weighted assets (from 1 January 2019, 18% from 1 January 2022) and the 6% of the assets used to calculate the leverage ratio under Basel rules (from 1 January 2019, 6.75% from 1 January 2022).
- 38.
To be precise, the FSB provides that entities subject to the TLAC framework may use instruments that are not subordinated to satisfy TLAC requirements, but with the limit of 2,5% of Risk-Weighted Assets (FSB 2015).
- 39.
Integration makes it easier, in the case of TLAC, to ensure that the calculation of firm-specific requirements is aligned for capital and MREL requirements.
- 40.
Council Conclusions on a roadmap to complete the Banking Union 17 June 2016 no. 7 (a) highlighted the amendments to implement TLAC standard and reviewing the minimum requirement for own funds and eligible liabilities (MREL)’. See EU Commission Proposal for a Directive amending Directive 2014/59/EU on loss-absorbing and recapitalisation capacity of credit institutions and investment firms and amending Directive 98/26/EC, Directive 2002/47/EC, Directive 2012/30/EU, Directive 2011/35/EU, Directive 2005/56/EC, Directive 2004/25/EC and Directive 2007/36/EC. Brussels, 23 November 2016 COM(2016) 852 final 2016/0362 (COD).
- 41.
Supra 2.1.
- 42.
See also Chap. 16, para. 2.1.2.
- 43.
The recommendation called for the introduction of new EU requirements, whereby: “in the steady state, credit institutions in the EU should be required to disclose the quantum and composition of their MREL-eligible liabilities, as well as the MREL required from them by the resolution authority. The BCBS recommendations, once finalised, should serve as a starting point and should be extended to cover all of the MREL-eligible liabilities of G-SIBs and non-G-SIBs. They should also be extended to include information on other financial instruments subject to bail-in as well as information on the creditor hierarchy. In the transitional period, and pending finalisation of the BCBS recommendation in this area credit institutions in the EU should be required to disclose to investors the quantum and composition of their stack of MREL-eligible liabilities, as well as information on the creditor hierarchy (at a minimum). In addition, disclosure should be required or actively encouraged if a failure to roll over MREL debt could lead to automatic restrictions on distributions.”
- 44.
Up until 2012, the Supreme Court rejected that the breach of conduct rules related to the transparency in the marketing of financial products, could constitute the basis for a claim of annulment, and thus restitution.
- 45.
Again, the clients alleged that they were not duly informed of the risks, which included the risk of cancellation paying the price of the swap at that moment.
- 46.
Judgment C-415/11.
- 47.
Judgment C-604/11, cit., paras. 49–55.
- 48.
Among many, see RoJ 2015/4664, RoJ 2015/5461, RoJ 2015/674, RoJ 2015/5777.
- 49.
See Spanish decisions RoJ 2015/608, RoJ 4004/2015, RoJ 610/2016, RoJ 3138/2016.
- 50.
The DGS (Fondo de Garantía de Depósitos de Entidades de Crédito) would be allowed to both acquire shares and debt from SAREB, and to acquire shares from entities that transferred NPLs to SAREB, in order to lessen the impact of the conversion mandated by the resolution authority (FROB), which shows how much the problem of NPLs was linked to the problem of hybrid capital instruments, from both, a solvency, and investor protection perspectives.
- 51.
This implies both a duty to design products in such a way that they meet the demands of their specific reference market (end clients), and a duty to ensure that they are then actually marketed to that reference market through coherent commercial and business practices.
- 52.
As regards the issues arising from self-placement see Chap. 15, paras. 5 and 7.
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Lamandini, M., Ramos Muñoz, D. (2019). Minimum Requirement for Own Capital and Eligible Liabilities. In: Chiti, M.P., Santoro, V. (eds) The Palgrave Handbook of European Banking Union Law. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-13475-4_14
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