Since 27 June 2019, EU-based G-SIIs and other institutions with MREL decisions higher than loss-absorption amounts are under an obligation to seek approval from the SRB in addition to approval from competent authorities to call, redeem, or repurchase eligible liabilities before their contractual maturities. Applications for approval must be made at least four months in advance. As well, when replacing eligible liability instruments, information on the cost of the replacement instrument and the impact of the replacement on the sustainability of the institution’s profitability should be included in the application.

“When the AT1 market began about six years ago, investors could focus on an issuer’s CET1 capital position compared to the write-down/conversion trigger and the required level to avoid calculating the MDA,” said Pauline Lambert, executive director in the banks team of Scope Ratings and author of an AT1 update published today. “This is evolving to a point where investors will need to evaluate whether a bank is meeting various solvency requirements including leverage and MREL, and not just CET1 capital.” At the end of 2020, a new MREL-related MDA will be coming into effect.

While the EU banking reform package was adopted a few months ago, amendments to the BRRD and the new MREL framework will not be in place until the end of 2020. Consequently, the SRB will continue to set MREL for more complex banks according to its ‘2018 MREL policy for the second wave of resolution plans’ published in January 2019. By the beginning of 2020, it intends to publish its ‘2020 MREL policy’, for MREL-setting under the new BRRD framework.

In the meantime, EU-based G-SIIs must also meet the TLAC requirements included in the amended CRR which went into effect last month. They will be subject to CRR statutory TLAC and internal TLAC requirements as well as binding SRB MREL decisions in parallel until the new BRRD legal framework is in place. “While most EU-based G-SIIs are comfortably positioned against current TLAC and MREL requirements this could change as requirements evolve,” said Lambert.

The SRB will also be reviewing whether an allowance of up to 2.5% of senior preferred debt can be used to meet external TLAC requirements. Helpfully for investors, banks will need to provide more disclosure, including the composition of owns funds and eligible liabilities, the amount of issuance included in the senior allowance, and the ranking of eligible liabilities in the creditor hierarchy.

The AT1 update can be downloaded here.