BBVA calls for higher regulatory clarity regarding future loss-absorption standards
More clarity in regulatory matters on future loss-absorption standards is needed for financial entities to start issuing new loss absorbing instruments that comply with the new requirements. This was one of the topics addressed during the Eurofi Financial Forum, one of the most prestigious in the European financial sector, which is taking place this week in Amsterdam.
In this line, José Manuel González-Páramo, executive director BBVA and head of Global Economics, Regulation & Public Affairs, speaking at the Eurofi, said that banks will need to start issuing considerable amounts of instruments that can be taken into account in MREL (Minimum Required Eligible Liabilities) calculations. This new regulatory requirement will require European banks to create a solvency buffer to absorb losses and recapitalize the institution if it faces a resolution process.
MREL is the European version of the TLAC (Total Loss Absorbing Capacity), a similar requirement, but with a global scope. Both banks and investors need to clearly understand understanding of these requirements and the conditions under which the loss absorbing scheme will run.
In an op-ed titled What are the challenges for MREL and TLAC?, José Manuel González-Páramo explains that a central premise of the new regulatory framework is that future bank recovery and resolution will be supported by shareholders and private creditors through the bail-in tool. In order to make this new paradigm credible, banks must at all times have enough liabilities to absorb losses and recapitalize.
For this purpose, regulatory authorities have established that all European banks need to comply ex-ante with a minimum requirement of eligible liabilities and own funds (MREL). For Global-Systematically Important Banks (G-SIBs), the new requirement is called TLAC. However, BBVA’s executive director says However, there is currently a lot of confusion concerning the way they will work in practice.
José Manuel González-Páramo reminds that, Concerning MREL, authorities will set banks’ target level very soon. However, at this point, this new requirement’s definitive configuration is still uncertain. In his opinion, more clarity, or more time, is needed for financial entities to start adapting their capital planning and issuing new loss absorbing instruments.
Likewise, he argues that, despite sharing the same objective, MREL has significant differences with TLAC. The compatibility in Europe of both ratios is a crucial element to ensure consistency and guarantee a level playing field. To this end, regulation should ensure that all business models are feasible. Hence, TLAC and MREL features need to be neutral for different business models, avoiding artificial changes in the nature of the entities or their resolution strategy.
More clarity is needed for financial entities to start adapting their capital planning and issuing new loss absorbing instruments
González-Páramo also says that the bulk of these instruments will be purchased by institutional investors with a good knowledge of their risks. However, authorities want to discourage banks to invest in these products to avoid contagion. But, according to BBVA’s executive director, under certain conditions, they should allow banks to hold TLAC/MREL instruments for market making purposes.
Another crucial aspect is the debate on debt subordination so that it can be taken into account in TLAC/MREL calculations.
Although not all the jurisdictions need to have exactly the same hierarchy scheme, a certain minimum level of harmonization is necessary.
In fact, in González-Páramo’s opinion, in Europe, and especially in the Eurozone, the need for harmonization is much higher. The Eurozone is in the process of becoming a single jurisdiction, which implies that there should be no significant differences in the subordination schemes of the members states.
The purpose is to give institutions and investors certainty, clarity and predictability about the treatment of the instruments they have invested in, to maintain the attractiveness and competitiveness of European markets and to ensure a level playing field.