Bank of Spain today notified BBVA about the new MREL requirement that the bank will need to comply with starting January 1, 2021. According to BBVA estimates, the current structure of own funds and eligible liabilities in its balance sheet is in line with this MREL requirement, as well as the new subordination requirement.
Bank of Spain today notified BBVA about the new MREL requirement (Minimum Requirement for own funds and Eligible Liabilities) set up by the Single Resolution Board (SRB). By January 1, 2021 BBVA must reach an amount of own funds and eligible liabilities equivalent to 15.16 percent of total liabilities and own funds of its resolution group. This new requirement represents a negligible variation from the previous requirement (15.08 percent). This slight increase comes from the evolution of the balance sheet between the end of 2016 and the end of 2017, since the requirement is set according to the balance on a specific date. The MREL requirement would be equal to 28.50 percent in terms of risk-weighted assets (RWAs).
MREL does not apply to BBVA Group’s consolidated balance sheet, but only to a European scope of resolution, of which BBVA S.A. accounts for more than 95 percent. According to 2017 year-end data - the balance sheet analyzed by the supervisor - BBVA’s total own funds and eligible liabilities of this European scope of resolution stood at €371,910 million while RWAs reached €197,819 million.
Also, as expected, a new subordination requirement has been established, whereby institutions must meet part of their MREL requirement with a minimum percentage of subordinated instruments, such as regulatory capital, subordinated debt and senior non-preferred debt. In the case of BBVA, starting January 1, 2021, the bank must hold an amount of own funds and eligible liabilities equivalent to 8.01 percent of the total liabilities and own funds of its resolution group, after applying the allowance established in the standard, which allows covering part of this percentage with non-subordinated instruments, such as senior debt. In terms of RWAs, this subordination requirement would amount to 15.05 percent.
BBVA estimates that, given the current structure of own funds and eligible liabilities of its resolution group, it already complies with the aforementioned MREL requirement, as well as with the new subordination requirement.
Furthermore, the bank maintains its plan to roll over senior preferred debt instruments and covered bonds maturities for the 2019-2021 period by issuing eligible liabilities. As of January 1, 2018, maturities for the aforementioned three-year period amounted to approximately €9 billion, of which BBVA has already issued non-preferred senior bonds worth a combined total of €7.29 billion. BBVA complied with this MREL requirement in advance with a first issue of this kind in August 2017, for a total of €1.5 billion, plus two private placements that same year totaling €290 million. Subsequently, since January 1, 2018, the bank has issued a total of €5.5 billion of non-preferred senior debt. Additionally, on November 7, BBVA issued a €1 billion senior preferred bond to replace another issue that was excluded from MREL calculations in October.
BBVA estimates that, given the current structure of own funds and eligible liabilities of its resolution group, it already complies with the aforementioned MREL requirement, as well as with the new subordination requirement
What is MREL?
The purpose of MREL is to ensure that European banks have own funds and eligible liabilities to absorb possible losses in case the supervisor deems them as failing.
The Bank Recovery and Resolution Directive (BRRD) created this requirement to make sure that troubled institutions hold enough own funds and eligible liabilities to, first, absorb possible losses, and, second, recapitalize without having to resort to public funds. So, the purpose of this buffer of own funds and eligible liabilities is to avoid taxpayers footing the bill in a possible bank bailout.
How is MREL determined?
The MREL requirement is determined for each individual institution separately, taking into account capital requirements and other factors such as the corporate structure of each institution and its strategy in case of resolution.
In the case of BBVA, given its MPE (‘Multiple Point of Entry’) strategy, the MREL requirement does not apply to BBVA Group’s overall balance sheet, but only to a European scope of resolution, of which BBVA S.A. - the Group’s parent company responsible for the Group’s business in Spain - accounts for more than 95 percent.