Saturday 3 December 2016

EU considers easing rules governing loss absorbency and bank failures

Rebecca Christie

Published 27/03/2016 | 02:30

While the euro area currently has eight banks on the FSB's top 30 list, two other EU nations, the UK and Sweden, count five more between them, including HSBC.
While the euro area currently has eight banks on the FSB's top 30 list, two other EU nations, the UK and Sweden, count five more between them, including HSBC.

The European Union is considering easing bank-failure rules that were introduced to end the era of expensive taxpayer-funded bailouts.

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A discussion paper prepared by the European Commission envisions setting EU loss-absorbency requirements for its biggest banks, led by HSBC Holdings and Deutsche Bank, in line with those issued in November by the Financial Stability Board (FSB) for the world's 30 most systemically important lenders.

The paper, dated this month, and which has been seen by Bloomberg, "explores possible options" for implementing the FSB rule in the EU and isn't binding on the Brussels-based commission.

Yet Elke Koenig, head of the euro area's bank resolution authority, has repeatedly said that the currency bloc would exceed global standards to ensure that its biggest banks can be restructured and recapitalised without threatening financial stability.

"On nine out of 10 occasions," requirements in the banking union would be stiffer than the FSB's rules on total loss-absorbing capacity (TLAC), she said in December.

As the EU prepares to implement global banking standards, including TLAC, the leverage ratio and the net stable funding ratio, it is struggling to boost lending and kick-start the economy.

As a result, Jonathan Hill, the EU's financial services commissioner, has said he will take into account the impact these rules could have on European business.

Koenig's Single Resolution Board is watching the policy debate closely and she is not alone.

While the euro area currently has eight banks on the FSB's top 30 list, two other EU nations, the UK and Sweden, count five more between them, including HSBC.

The FSB requires banks to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities, equivalent to 18pc of risk-weighted assets, by 2022. A 6.75pc leverage-ratio requirement will also apply.

Koenig has consistently spoken of a loss-absorbing baseline for top banks of 8pc of total assets. In December, she said this equated roughly to 24pc on a risk-weighted basis. This 8pc figure corresponds to the amount of total liabilities, including own funds, that must be wiped out under EU law before a bank in resolution can tap into rescue funds built up from levies on the industry.

The commission's paper states that European firms on the FSB list would be held to the greater of the two standards - based on risk-weighted assets or a leverage ratio-exposure measure - as laid out by the Basel-based global regulator.

In addition to the potentially lower minimum loss-absorbing requirement for big lenders, the paper sets out a series of conditions to be met before bank-specific add-ons could be applied.

Authorities would need to consider a "resolvability assessment" of the bank and whether extra requirements were "proportionate and necessary", it states.

A high MREL requirement "would need to be substantiated as necessary on grounds of potential loss-absorption needs," according to the document, meaning the authority would need to show "that the bank is likely to incur the extent of losses that justify such a high calibration".

A spokeswoman for the European Commission declined to comment on the paper last week.

Taken together, its discussion points raise the question of whether banks will be required to have the liabilities and own funds available for bail-in, so they can gain access to rescue funds in a crisis. The European Banking Authority has said that the EU's loss-absorbency standard, known as the minimum requirement for own funds and eligible liabilities, or MREL, is needed to "ensure the effectiveness of the bail-in tool".

© Bloomberg

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