Starting Jan. 1, 2022, BBVA will be required to meet a volume of own funds and eligible liabilities (MREL) of 24.78 percent of its risk-weighted assets (RWAs), in line with expectations. As of March 31, 2021, the bank already complies with this requirement, reaching 29.23 percent, as well as with the new subordination requirement.
The 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). On 1 January 2022, BBVA must reach an amount of own funds and eligible liabilities equivalent to 24.78 percent of RWAs of its European resolution group, compared to the previous 28.50 percent requirement. This reduction in the requirement is largely due to the fact that under the new applicable regulation, the MREL requirement does not include the combined capital buffers. This MREL requirement in terms of RWAs is equivalent to 10.25 percent in terms of total exposure considered for the purpose of calculating the leverage ratio.
MREL does 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. According to 2019 year-end data for the balance sheet analyzed by the supervisor¹, BBVA's total RWAs of this European scope of resolution stood at €204,218 million, while the total exposure taken into account to calculate the leverage ratio reached €422,376 million.
Additionally, the SRB also establishes a subordination requirement, in accordance to which institutions must 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 must hold an amount of own funds and eligible subordinate liabilities equivalent to 13.50 percent of the RWAs of its European resolution group, (versus the previous requirement of 15.05 percent). As for total exposure considered for the purposes of calculating the leverage ratio, this subordination requirement would stand at 5.84 percent.
Given the current structure of own funds and eligible liabilities of its resolution group, BBVA already complies with the aforementioned MREL requirement, as well as with the new subordination requirement, both in terms of RWAs and in terms of exposure of the leverage ratio.
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 will be strengthened. All this leads to having reduced financing needs this year in the debt markets. BBVA's wholesale financing program for 2021 envisages issuances worth €2 billion in senior preferred and non-preferred debt to replace the instruments issued in 2017, now in their final year, with the consequent loss of eligibility for MREL purposes. In this sense, the program’s execution began in March 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.