Having regard to the minimum requirement for own funds and eligible liabilities (MREL) setting experience gained in 2017 and as a result of analysis conducted during the 2018 planning cycle, the Bank Guarantee Fund revised the methodology for calculating MREL. The key points of this methodology are presented below.
Preferred resolution strategy envisaged in a resolution plan, is a decisive factor determining the MREL calibration required by the BGF.
Where the BFG concludes that liquidation under normal insolvency proceedings is feasible and credible MREL is determined at the level of the prevailing capital requirements hence there will be no additional charges for a bank.
Where the preferred resolution strategy indicated in the plan is write-down or conversion of liabilities, MREL should be determined at the level which allows to cover all losses incurred by the bank and to recapitalize it up to the amount sufficient to meet the minimum capital requirements and to restore market confidence, with regards to its estimated size after the use of resolution tools.
Should the bank be resolved via a sale of business tool, the determined MREL should be sufficient to absorb losses of the institution and to cover additional capital needs of the acquiring entity due to the transfer of assets and liabilities from the failed institution.
Banks will have time to attain the defined level of the MREL by 1 January 2023. In substantiated cases, the Fund may set a different transitional period for a given entity.
The amount for loss absorption= [the total capital ratio determined in line with the article 92 and 458 of the CRR[1] (8%) + the additional capital requirement determined by the Polish Financial Supervision Authority on the basis of the article 138, paragraph 1, point 2 or 2a of the Banking Act[2] excluding the requirement set to cover systemic risk referred to in article 4 point 15 of the Act on macroprudential supervision[3] + capital buffer for systemically important financial institutions] * the total risk exposure amount;
The amount for recapitalization = the scaling factor * [the total capital ratio determined in line with the article 92 and 458 of the CRR (8%) + the additional capital requirement determined by Polish Financial Supervision Authority on the basis of article 138, paragraph 1, point 2 or 2a of the Banking Act + the combined buffer requirement] * the total risk exposure amount;
The scaling factor:
– The bail-in strategy →(1-the amount for loss absorption/ the total risk exposure amount),
– P&A strategy → 55% (selected cooperative banks) or 70%[4]
The aim of the scaling factor is to factor in the change in the scale of bank’s operations determined as a total risk exposure amount after the bail-in at the level of the amount for loss absorption, taking into account resolution strategy.
Own funds– the funds defined in the art. 4 par. 1 point 118 of CRR
Liabilities – total liabilities minus own funds and subordinated debt included in the own funds,
The total risk exposure amount– the amount calculated on the basis of the article 92, paragraph 3 and 4 of the CRR.
According to article 97(5) of the Act on Bank Guarantee Fund[5], a liability may be counted towards MREL if it meets all of the following conditions:
- an instrument based on which a liability has arisen has been issued and fully paid;
- an instrument based on which a liability has arisen is not owned by that bank;
- liability is not secured by this bank;
- acquisition of the instrument based on which a liability has arisen is not funded directly or indirectly by that bank;
- residual time until the liability falls due is not less than one year;
- it does not arise from a derivative instrument;
- it does not arise from the deposit which has been assigned with preference in satisfaction of claims in bankruptcy proceedings.
The BGF expects certain structure of MREL eligible instruments. Having in mind the „no creditor worse off than under normal insolvency proceedings” principle and the necessity to provide internal sources of financing resolution costs in a way that will not adversely impact feasibility or credibility of a resolution plan, the Fund expects that:
- the MREL will consist of own funds and subordinated debt which according to categories in the creditor hierarchy described in art. 440 paragraph 2 of the Insolvency Law, are satisfied after liabilities determined in the fifth category;
- debt instruments included in the MREL shall be purchased by professional clients within the meaning of the appendix II of the directive 2014/65, that is to say, they will not be offered to retail clients and
- a nominal value per unit of a MREL eligible debt instrument shall amount at least 400 000 PLN.
The BFG also expects that eligible liabilities issued to cover MREL requirement at the consolidated level constituting a surplus over the minimum amount of own funds and eligible liabilities subject to write down and conversion set at individual level fulfill at least the conditions determined in point 2 i.e. liabilities purchased by professional clients.
The above presented approach of the Fund to the MREL calculation is of a general nature and may differ with regards to particular entities.
The banks receive detailed information on the individually determined MREL in a due course. MREL will be subject to reviews and adjusted to the current level of capital requirements and other data representing the basis for the MREL calculation, during resolution plans reviews. New levels of the conservation buffer referred to in article 19 and 84 of the Act on macroprudential supervision would be also taken into account.
The above presented approach of the Fund to the calculation of the MREL will be subject to review after the entry into force of amendments to the BRRD[6]/CRR/CRD IV[7]. In addition, the Fund reminds that the directive 2017/2399[8] with regards the ranking of unsecured debt instruments in insolvency hierarchy, amending the BRRD, should be implemented into the Polish law by 29 December 2018.
[1] Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (EU OJ L 176, 27.06.2013, p. 1–337).
[2] The Banking Act of 29 August 1997 (Journal of Laws of 2015 item 128, as amended).
[3] The Act of 5 August 2015 on macroprudential supervision over the financial system and crisis management (Journal of Laws item 1513, as amended).
[4] Subject to an expert assessment.
[5] The Act on 10 June 2016 on the Bank Guarantee Fund, Deposit Guarantee Scheme and Resolution (Journal of Laws item 996, as amended).
[6] Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (EU OJ L 173, 06.12.2014, p. 190).
[7] Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (EU OJ L 176, 27.06.2013, p. 338–436).
[8] Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy (EU OJ L 345, 27.12.2017, p. 96–101).
