To help ensure that banks remain resilient and capable of withstanding future shocks, the Council presidency and the European Parliament reached a provisional agreement today on a draft regulation which will strengthen the prudential regulatory framework for credit institutions operating in the Union. The ‘Daisy Chain’ proposal introduces targeted adjustments that will help improve the resolvability of bank institutions.
The revised Union bank resolution framework aims to better ensure that the loss absorption and recapitalisation of banks occurs through private means when those banks become financially unviable and are placed in resolution.
The Daisy Chain proposal amends the Union bank resolution framework by:
- incorporating a dedicated treatment for the indirect subscription of instruments eligible for internal minimum requirement for own funds and eligible liabilities (MREL)
- further aligning the treatment of global systemically important institution (G-SII) groups with a Multiple Point of Entry (MPE) resolution strategy with the treatment outlined in the Financial Stability Board’s (FSB) international Total Loss-absorbing Capacity Term Sheet (the ‘TLAC standard’)
- clarifying the eligibility of instruments in the context of the internal TLAC.
Today, the co-legislators succeeded in bridging their divergences on the text including on the two main political issues:
- The first point concerns the deduction regime for own funds and eligible liabilities meeting the requirements for loss-absorption in resolution (MREL) that are channelled through an intermediate entity in the context of their upstreaming within complex resolution groups, nicknamed ‘Daisy Chains”. Under the provisional agreement, a revised deduction regime is introduced, so as to avoid in particular double-counting of MREL elements at the level of intermediate entities, thus ensuring that EU banking groups always keep a robust loss-absorption capacity in line with their disclosed MREL. In addition, a carefully framed review clause is added, to take into account the impact on different types of banking group structures. Such potential improvements will be assessed by the Commission services, with a view to possible inclusion within the future Bank Recovery and Resolution Directive (BRRD) review proposal, expected from the Commission in the course of 2022.
- The second point concerns the treatment of groups with a multiple-point-of-entry resolution strategy (MPE groups), as opposed to a single-point-of-entry (SPE) resolution strategy, especially as regards aligning such treatment on the regime foreseen under TLAC international standards and taking into account third-country entities within such groups. The issue arises especially in cases where the resolution regime of a third country is not equivalent to the regime in force in the Union. Under the provisional agreement, a well-framed transitional regime, with additional flexibility until end-2024, is introduced for MPE groups, subject to an assessment by EU resolution authorities.
The provisional agreement reached today is subject to approval by the Council and the European Parliament before going through the formal adoption procedure.
On 28 October 2021 the Commission presented the ‘Daisy Chain’ proposal. It is part of the single rulebook of the Banking Union and amends the rules in the Capital Requirements Regulation and the Bank Recovery and Resolution Directive.
Regulation (EU) No 575/2013 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU of the European Parliament and of the Council (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and the CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in particular within the Basel Committee on Banking Supervision (BCBS).
Resolution related issues have been identified since the revised TLAC/MREL framework became applicable in 2019. The Daisy Chain proposal aims to address those issues.
The Council adopted its negotiating mandate on 21 December 2021. The European Parliament adopted its negotiating position in mid-February 2022. Trilogues between the co-legislators started on 31 March 2022 and ended in the provisional agreement reached today.