Good morning, and thank you for having invited the SRB and myself to this conference. This is the second time I participate and I find it a good opportunity to have an exchange of views with market participants.
Today I would like to update you on the latest innovations from the SRB on policy and where banks stand in terms of MREL build-up and resolvability.
SRB priorities 2022 & 2023
Regarding the SRB priorities for 2022 and 2023, the SRB issued in 2020 a guidance on what actions banks need to take to become resolvable. This document is called Expectations for Banks. A transition period was foreseen for its implementation, as it is acknowledged that the resolvability is not done overnight. Now, we are approaching the finishing line as the transition period expires at the end of the next year.
For 2022 and 2023, we provided a longer time path for three main areas. Firstly, liquidity and funding in resolution. This is banks’ money that should be available at the time of resolution. This priority comprises the identification of the sources of liquidity, the estimation of these sources and the mobilisation of collateral and reporting of these estimates to the resolution authority.
Secondly, separability and restructuring. When the resolution strategy envisages a transfer tool, there should be an identification of assets and liabilities that can be separated, as well as the capacity to reorganise the institution after the bail-in.
Thirdly, the Management Information System (MIS) for bail-in execution and valuation. Banks should perform the MIS self-assessment to evaluate their capacity to provide critical information for the valuation of assets and liabilities.
These priorities are complemented by bank-specific priorities reflected in the so-called ‘priorities letters’ received by the banks under SRB’s remit around September and October, regarding the state of play and what the banks need to commit to for the following year.
Finally, on MREL, we took into account the various developments in the regulation, like the indirect holdings of internal MREL and the MPE strategies, and developments in the supervisory side, such as the leverage relief measures.
To go more in detail on MREL, the most important topic concerns the recent change to the Capital Requirement Regulation (CRR), published on 25 October in the Official Journal, to clarify the provisions in two areas: (i) the treatment of surpluses over the requirements of sub-group entities located in third countries for the TLAC requirement of the EU group parent company which follows a Multiple-Point-of-Entry (MPE) resolution strategy; (ii) the treatment of internal MREL in case of indirect holding of the non resolution entity (so-called daisy chain).
For banks with an MPE resolution strategy, the legislation foresees a transition period until 31 December 2024. The reason for a transition period is related to the lack of clarity in the CRR about the treatment of surplus liabilities in subsidiaries located in third-country jurisdictions and belonging to EU MPE groups, in case the country in question had not adopted yet the FSB Resolution standard. Now the legislation has clarified that, if the third country has not a resolution framework in place, during the transition period it is possible for an EU resolution authority to recognize the surplus in a third country for the purposes of the TLAC calculation at the EU parent company if either of two conditions are respected: (i) there is no current or foreseen material practical or legal impediment to the transfer of assets from the subsidiary to the parent institution or (ii) the relevant third-country authority of the subsidiary has provided an opinion to the resolution authority of the parent institution that assets equal to the amount to be deducted by the subsidiary could be transferred from the subsidiary to the parent institution. After 1 January 2025, should the third country not have implemented a resolution framework, then surpluses will no longer be considered by the SRB for reducing the amount which is deducted from TLAC (and from the MREL requirement, treated in the same way as the TLAC one).
On the daisy chain, the legislation has foreseen that, for organizational structures with a parent/resolution entity and for example two subsidiaries in a chain, the holdings of MREL instruments issued indirectly - by the second subsidiary - to the resolution entity via the intermediate entity shall be deducted fully from the internal MREL capacity of the latter, in order to avoid a dilution effect.
Regarding the eligibility of MREL instruments, the CRR and other relevant pieces of legislation detail the features that the liabilities need to have in order to be eligible for MREL purposes. Last year we have already requested banks to report the liabilities that they consider eligible for MREL. We have also requested banks to provide the sign-off by the appropriate level of management, confirming that the liabilities reported are effectively eligible. For next year, we have in mind to strengthen the monitoring of the eligibility of MREL instruments reported by banks.
Another development regards the so-called prior permission. Article 78a CRR introduces the need to obtain a prior authorization from the resolution authority in order to redeem eligible liabilities. The legislation also envisages that, in addition to that authorization, when institutions redeem or repurchase an instrument, they have to observe a margin on top of MREL plus buffers, which has to be agreed by the resolution authority with the supervisory competent authority. For the transactions authorised from the beginning of January 2023 we have introduced, in agreement with the SSM, a margin equal to the lower value between the amount of instruments to be redeemed (which has to be deducted from the MREL stock) and the value of the Pillar 2 Guidance.
Q2 2022 MREL-dashboard
In terms of the MREL build-up, the average MREL final target including capital buffers was higher than 26% of the total risk exposure amount at the end of June 2022. It is fairly stable, with a slightly higher average target for bail-in banks, and slightly lower for transfer strategies. This is because of the reduction of the recapitalisation amount in case of the use of the transfer strategies, which take into account a lower size of the balance sheet after resolution.
The shortfall was about €32bn. It is widespread across banks, with relatively higher concentration in certain countries or banks, though overall we note a substantial reduction with respect to the same quarter in the previous year. Non-Pillar 1 banks are the entities with the highest shortfall in percentage of total risk exposure amount and also in absolute value, while G-SIIs since a long time have no shortfalls, both in terms of overall requirement and subordinated one.
Moving to instruments issued under third country law, their stock is 18.5%, with the bulk of it issued under US and UK law. As concerns the cost of funding, the iTraxx indexes on senior and subordinated bonds spiked up in the period of higher tension, but have gone down throughout October and November. When the cost of funding spiked up around last February, it was still lower than the pandemic highs in February and March 2020, despite the higher interest rates, high inflation and the uncertainty regarding the future behaviour of the European Central Bank.
As regards issuances, there have been broad movements during the recent months, with issuers shifting from senior non-preferred to senior bonds in Q2, which accounted for 41% of total issuances. The issuance volume of senior non-preferred instruments was 31% of the total, declining significantly with respect to Q1.
I believe that we will have to wait until the first months of 2023 for higher activity, when hopefully the situation will be clearer for banks. We also have to take into account that different types of banks are viewed differently by investors. Large European banks will always find investors, however there is another tier of banks that normally issues domestically and finds it more difficult to issue internationally. There is also a third tier of banks that are a less known in their domestic market, and often are not even represented in market indexes, which at the moment find more difficult to issue. For these banks, the monitoring is more intense and they need to elaborate credible funding plans in the near future.
Progress on resolvability
Last but not least, allow me to touch upon the topic of resolvability. This is essentially related to the Expectations for Banks document. In July 2022 we took stock of the progress made by publishing the first aggregated results of the resolvability assessment by type of bank and resolvability profile. It is important to note the timing of this assessment, as all the relevant information arrives in a staggered way throughout the year, however for the purposes of the publication we only considered the information received until September 2021, which means that the Heat-map results may have already been changed, and likely improved, during the current year.
Next year we will consolidate all the information received until the end of 2022 and we will have a more complete picture. We will then be left with the last steps for resolvability.
In our assessment, we noticed most banks’ progress on: loss absorbing capacity - which is a crucial part of the resolvability; bail-in recognition, which is important since 80% of the banks under the remit of the SRB have this tool as preferred resolution strategy; governance and communication. The heatmap confirmed that work has to still be done particularly on liquidity and MIS. On operational continuity and continuity of access to financial market infrastructures (FMI) banks have made significant steps and are not very far away from the end of the resolvability journey. Finally, we have seen that G-SIIs are in a better shape compared to other types of banks.
We will continue to monitor the situation closely, in order to ensure that banks will be able to deliver on all the profiles of the Expectations for Banks guidance in a timely manner. It is important that banks continue to make progress on resolvability because, according to the legal framework currently in place, for non-resolvable banks at a certain point the SRB will need to take the necessary measures.
Thank you for your attention.