Starting Jan 1, 2022, BBVA must meet a volume of own funds and eligible liabilities (MREL) of 21.46 percent, or 24.72 percent including the requirement of combined capital buffers in terms of its risk-weighted assets (RWAs). As of December 31, 2021, the bank already complied with this requirement, reaching 28.24 percent, as well as with the subordination requirement.
The Bank of Spain notified BBVA about the new MREL requirement (Minimum Requirement for own funds and eligible liabilities) set up by the Single Resolution Board (SRB), and calculated with information as of June 30, 2021. Starting Jan. 1, 2022, BBVA must reach an amount of own funds and eligible liabilities equivalent to 21.46 percent of RWAs of its European resolution group at sub consolidated level, compared to the 24.78 percent requirement in application until now. This reduction in the requirement is largely due to the sale of the BBVA Group’s U.S. subsidiary, announced to the market last June. This new MREL requirement stands at 7.50 percent in terms of total exposure considered for the purpose of calculating the leverage ratio.
Additionally, the SRB also establishes a subordination requirement, which orders institutions to meet part of their MREL requirement with a minimum percentage of subordinated instruments, (those with a subordination level equal or higher than that of the senior non-preferred debt). In the case of BBVA, starting January 1, 2022, the bank will have to maintain an amount of own funds and eligible subordinate liabilities equivalent to 13.50 percent of the RWAs of its European resolution group. As for total exposure considered for the purposes of calculating the leverage ratio, this subordination requirement would stand at 5.84 percent.
On top of the MREL and the subordination requirement in RWAs, there is a combined requirement of capital buffers. According to current regulations and the criteria from the supervisor, this requirement stands at 3.26 percent.
Given the current structure of own funds and eligible liabilities of its resolution group, BBVA complies with MREL (including the combined capital buffers), as well as with the subordination requirement, both in terms of RWAs and in terms of exposure of the leverage ratio.
The MREL and the subordination requirements do not apply to BBVA Group’s consolidated balance sheet, but only to a European scope, which is made up mainly of BBVA S.A., the parent company that includes the business in Spain. With information as of June 30, 2021, which is the balance sheet analyzed by the supervisor¹, BBVA's total RWAs of this European scope of resolution stood at €190,377 million, while the total exposure taken into account to calculate the leverage ratio was €452,275 million.
BBVA currently has around 90 percent of eligible instruments for MREL purposes with a degree of subordination equal or greater than that of senior non-preferred debt, evidencing its high loss absorption capacity.
Following the sale of BBVA’s U.S. subsidiary, the Group’s MREL position has been strengthened. All this led to reduced financing needs in the debt markets for this year. BBVA's wholesale financing program for 2022 envisages issuances between €2 billion and €3 billion in senior preferred and non-preferred debt to replace the instruments in their final year, with the consequent loss of eligibility for MREL purposes. In this sense, the program’s execution began in January with the issue of a €1-billion senior preferred bond.
What is MREL?
The purpose of MREL is to ensure that European banks possess funds of their own 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 of an eventual bank bailout.
How is MREL determined?
The MREL requirement is determined for each individual bank 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’) resolution strategy, the MREL requirement does not apply to BBVA Group’s overall balance sheet, but only to a European scope of resolution, which is made up mainly of BBVA S.A., the parent company that includes the business in Spain.