On 29 October 2020, the European Banking Authority (EBA) published its first monitoring report on the minimum requirement for own funds and eligible liabilities (MREL) and total loss absorbing capacity (TLAC) instruments.
The EBA has prepared the report in accordance with Article 80(1) of the Capital Requirements Regulation which specifies that the ‘EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.
The purpose of the report is to inform external stakeholders about the monitoring that the EBA has performed on TLAC- and MREL-eligible liabilities instruments so far and to present its current policy views, as well as areas in which further work is ongoing. The report is based on the review of 27 transactions issued in 14 jurisdictions for a total amount of EUR 22,75bn. In particular, the report includes EUR 21bn of senior non-preferred issuances and EUR 1,75bn of senior holding company issuances. The report contains recommendations in the following areas: subordination, capacity for loss absorption, maturity and tax gross-up. The report also stresses the areas where further work from the EBA is ongoing. In particular, the report highlights the importance to provide further guidance on the interaction between the clauses used for environmental, social and governance capital issuances and the eligibility criteria for eligible liabilities instruments.
Among other things in the report the EBA observes that European banks have not waited for the adoption of the new banking package to start issuing MREL and TLAC instruments. The Financial Stability Board’s TLAC standard addressed to global systemically important banks was published in 2015, and in Europe the Bank Recovery and Resolution Directive introduced, around the same time and for the broader population of banks, an MREL requirement with similar purposes to those of TLAC.