The principles for resolution and MREL have been finalised against the background of the public consultation on the FSA’s January 2017 discussion paper and subsequent dialogue with the banks’ trade associations.
The trade associations and the FSA agree that distressed banks should as far as possible be dealt with through private solutions. Where this is not possible, the point of departure is a model where as many of the bank’s assets as possible are sold, while the remainder are continued for a period as an institution under the control of the resolution authority Finansiel Stabilitet (orderly wind-down). Where necessary, following a specific, individual assessment, the FSA may transfer control to Finansiel Stabilitet if a bank does not comply with its MREL.
MREL add-on of 3½-6%
For non-SIFIs with total assets below EUR 3 billion, the MREL add-on over and above the solvency need and capital buffers will be in the interval of 3½-6% of the total risk exposure amount (REA) and will average 4.7%. MREL for small and medium-sized banks will be higher than their existing capital requirements, but lower than for systemically important financial institutions (SIFIs). For institutions with assets below EUR 3 billion, the European Commission has given advance approval for the use of the resolution fund to recapitalise the distressed bank. For institutions with assets above EUR 3 billion, there is therefore a need for greater protection, and they will therefore have a higher MREL add-on than those with assets below EUR 3 billion.
The FSA and the industry’s own calculations – based on 2016 earnings and unchanged business conditions – indicate that the vast majority of banks will be able to meet the new requirements with a phase-in period of five years by retaining future years’ earnings. Only a few are expected – under the given calculation assumptions – to need to turn to the capital market or reduce their balance sheets.
Increased braking distance, but still a risk of losses
The model chosen lies somewhere between the model for SIFIs and the requirements for equivalent institutions in other countries. The model will increase the chances of finding private solutions, including mergers with stronger banks, because there will be more capital to work with. The strengthening of own funds and eligible liabilities will also generally increase protection for ordinary creditors and depositors relative to today.
However, senior unsecured creditors and deposits above the deposit guarantee scheme’s limit of EUR 100,000 (approx. DKK 744,000) will still be exposed in this model. In the event of an orderly wind-down under the control of Finansiel Stabilitet, substantial losses must, as is the case today, be expected for senior unsecured creditors and deposits above the limits for the deposit guarantee scheme.
The FSA expects to be able to approve resolution plans and set individual MREL for the banks by the end of 2017.
The work on resolution plans and MREL forms part of Denmark’s implementation of the EU’s Bank Recovery and Resolution Directive (BRRD). The Danish FSA approves resolution plans for individual banks following a recommendation from Finansiel Stabilitet, and sets individual MREL after consulting Finansiel Stabilitet.
Discussion paper: Resolution strategy and MREL for small and medium-sized banks