On 23 July 2020, the European Banking Authority (EBA) issued a public consultation on its draft Regulatory Technical Standards (RTS) specifying the methodology to be used by Member State resolution authorities to estimate the Pillar 2 (P2R) and combined buffer requirements (CBR)  at resolution group level for the purpose of setting the minimum requirement for own funds and eligible liabilities requirement (MREL) under the Bank Recovery and Resolution Directive (BRRD).The estimation of P2R and CBR is necessary for setting MREL when the resolution group perimeter differs significantly from the prudential perimeter at the level of which own fund requirements have been set by the Member State competent authority.

The legislative background to the draft RTS is Article 45 BRRD. Article 45e(1) BRRD provides that resolution entities shall comply with MREL on a consolidated basis at the level of the resolution group. However, MREL is calibrated on the basis of going-concern capital requirements that are, for some, set at the group level with a perimeter that differs from the resolution group’s perimeter. The difference, in some cases, can be particularly significant (for example for groups with a multiple point of entry strategy) and this may lead to group capital requirements that may under or overestimate the risks within a resolution group.

At present, Member State resolution authorities will typically use the group capital requirements to calibrate MREL at the resolution group level. Article 45c(4) BRRD mandates the EBA to develop a methodology for these resolution authorities to estimate the capital requirements to be used as an input for calibrating MREL.

The EBA consultation paper puts forward the methodology. It relies on the introduction of a threshold to only capture resolution groups that sufficiently differ to the prudential group. It also seeks to be pragmatic by combining a top down and bottom-up approach to estimating pillar 2 and combined buffer requirements.

The deadline for comments on the consultation is 24 October 2020.