The Banking Recovery and Resolution Directive (BRRD) has changed the logic of the European financial markets. It has clarified that shareholders and investors have to take on the losses by themselves, not expecting that Governments and taxpayers shall bail them out. This is a principle that applies to all regular companies and now also to banks in the European Union.
It has two important consequences that are essential to maintain. This was one of the main aims of your rapporteur when he as Parliament’s rapporteur was responsible for advancing the original BRRD proposal and turning it into legislation and reality.
First of all, when a bank is in trouble, there is a clear roadmap for how to deal with the losses. In principle, everything is bail-inable, not only own capital, with the consequence that the present owner will cover the losses, but also major investors and in the end depositors, in the ranking order decided. This means that in a resolution a bail-in can be applied without anyone being surprised or claiming that this was not foreseen. This means that there should be no room for anyone questioning or obstructing the bail-in.
For depositors and investors, this provides legal clarity and certainty which also gives security. Saved money of depositors is bailed in last and can also be refunded by national deposit insurance systems, within the applicable limits. Depositors can prepare themselves for a high level of security by spreading their savings across different banks or ensuring that the bank is safe and stable. The same applies to investors; they will be subject to a bail-in before depositors but in a designated order with different categories of capital. This facilitates an efficient bail-in and at the same time provides to everyone a clear picture of the risks they are exposed to, giving the opportunity to balance the risks that are acceptable.
Secondly, the awareness that everything can be bailed in creates market discipline where everyone knows that you can lose your shares, your capital or your investments. This forces banks to finance themselves in a way that provides owners and investors with the security they want in order to invest in the bank. As rapporteur for the BRRD, it was important for me, and for Parliament, to secure that all capital was bail-inable, and by that achieving legal clarity and a disciplined market.
Against this background, your rapporteur welcomes the introduction of TLAC in European legislation and in the BRRD as well as the SRMR, based upon international rules for global systemically important banks. At the same time, your rapporteur would like to underline that the special subordinated capital foreseen for loss absorption is not meant to circumvent the fact that with only certain specified exceptions all capital, all debt, is bail-inable, but rather that the subordinated debt is there to facilitate a rapid and stable process of resolution, not limit the debt that is bail-inable. For this reason, TLAC shall be implemented in line with G20 rules but not impose additional requirements beyond that’, in order to pave the way for increased investments and clarify the risks for an investor or depositor in a bank. This approach is also important in order to achieve a level playing field for European banks in the global competition.
European banks which are not GSIs shall not be required to comply with the TLAC rules but will be subject to the MREL as they already are. The Commission proposes to modify that regime as well.
It is your rapporteur’s view that the rules regarding TLAC and MREL must be designed in a way that they do not punish banks for increasing their level of capital or for maintaining a high level. This means that the requirements for MREL must be designed so that a bank with a high levels of own capital meets the same requirements on MREL as an otherwise equivalent bank (in terms of size, risk, business model) with a lower level of own capital.
Beside the amendments to the BRRD, a proposal to align the Single Resolution Mechanism Regulation (SRMR) accordingly has been presented by the Commission. Your rapporteur follows the proposed logic of alignment and therefore amends the SRMR in line with the above mentioned changes to the BRRD, where applicable. In particular, additional requirements on the Single Resolution Board (SRB) proposed by the Commission that do however not exist for other Resolution Authorities have been aligned with the BRRD.
Beyond the above mentioned elements, amendments related to the insolvency ranking are necessary in order to integrate TLAC standard requirements into the BRRD. A separate proposal addressing the creditor hierarchy within the BRRD has therefore been presented by the Commission and amended by your rapporteur in a separate draft report.