On 9 November 2018, HM Treasury (the Treasury) published a letter (dated 8 November 2018) to the Chair of the European Scrutiny Committee updating on the progress of negotiations on bank capital requirements (known as the Risk Reduction Package), which have reached the trilogue stage. The letter addresses progress on both the Bank Recovery and Resolution Directive, and the Capital Requirements Directive and Regulation. The Treasury notes that some technical issues have been agreed on a preliminary basis between the European Parliament and the Council of the EU (the Council) however issues still remain. The Treasury also notes the UKs interests in the negotiations.
Bank Recovery and Resolution Directive
The main issue in arising the trilogue negotiations is the framework for setting the EU’s Minimum Requirement for Own Funds and Eligible Liabilities (MREL). Further issues noted by the Treasury include:
- subordination: the European Parliament caps the level at 18% of risk weighted assets, which does not give resolution authorities the flexibility to require a higher level of subordination. The UK believes it is important that the resolution authority have the flexibility to set the appropriate quantity and quality of MREL;
- MREL eligibility criteria: the UK does not support the European Parliament or Council inclusion of structured notes as eligible for MREL, which is not in line with the Total Loss-Absorbing Capacity standard. There is also disagreement on the deadline for compliance;
- contractual bail-in clauses: the UK welcomes that both the European Parliament and the Council reject the Commission’s proposal to place the responsibility on the regulator for determining whether it is impracticable to amend a contract to include these clauses;
- moratoria power: both texts limit the new moratoria power to two business days – the UK advocates for the deletion of the new moratoria as it is not in line with international standards.
Capital Requirements Directive / Capital Requirements Regulation (CRD/CRR)
The Treasury notes that more convergence between the European parties is seen regarding negotiations on the CRD/CRR. A key issue concerning the UK during the course of negotiations is:
- supervisory flexibility: certain aspects of the European Parliament text would limit authorities’ ability to tailor their supervisory frameworks to the specific circumstances of their national banking system.
There has been a push to reach an agreement on the bank capital requirements by the end of the year – the Treasury will continue to provide letters updating on the progress of negotiations as necessary.