Daisy chains: provisional agreement on a revised bank resolution framework

To ensure that banks remain resilient and able to withstand future shocks, the Council Presidency and the European Parliament today reached a provisional agreement on a draft regulation which strengthen the prudential regulatory framework for credit institutions operating in the Union. The “Daisy Chain” proposal introduces targeted adjustments that will help improve the solvency of banking establishments.

The revised EU bank resolution framework aims to better ensure that the absorption of losses and the recapitalization of banks are done by private means when these banks become financially unviable and are placed in resolution.

The Daisy Chain proposal modifies the EU banking resolution framework by:

  • integrating a treatment dedicated to the indirect subscription of instruments eligible for the minimum internal requirement for own funds and eligible commitments (MREL)
  • further align the treatment of groups of Global Systemically Important Institutions (GSEIs) with a Multiple Entry Point (MPE) resolution strategy to the treatment outlined in the International Total Loss Absorbing Capacity Term Sheet of the Financial Stability Board (FSB) (the “TLAC” standard’)
  • clarify the eligibility of instruments under internal TLAC.

Today, the co-legislators succeeded in ironing out their differences on the text, including on the two main political questions:

  • The first point concerns the regime for the deduction of own funds and eligible commitments meeting the requirements for absorbing losses in resolution (MREL) which pass through an intermediary entity as part of their upstream within complex resolution groups, known as “Daisy Chains”. Under the terms of the provisional agreement, a revised deduction regime is introduced, in particular to avoid double counting of MREL items at intermediate entity level, thus ensuring that EU banking groups always maintain a strong loss absorbing capacity in line with their MREL disclosed. In addition, a careful supervision revision clause is added, to take into account the impact on different types of banking group structures. These potential improvements will be assessed by the Commission services, with a view to possible inclusion in the future proposal for the revision of the Bank Recovery and Resolution Directive (BRRD), expected from the Commission later in 2022. .
  • The second point concerns the treatment of groups with a multiple entry point resolution strategy (MPE groups), as opposed to a single entry point resolution strategy (SPE), in particular with regard to the alignment of this treatment on the regime provided for by the international TLAC standards and taking into account the entities of third countries within these groups. The question arises in particular in cases where the resolution regime of a third country is not equivalent to the regime in force in the Union. Under the terms of the provisional agreement, a well-framed transitional regime, with additional flexibility until the end of 2024, is introduced for MSE groupssubject to an assessment by EU resolution authorities.

The provisional agreement reached today is subject to the approval of the Council and the European Parliament before going through the formal adoption procedure.

Background

On October 28, 2021, the Commission presented the “Daisy Chain” proposal. It is part of the Banking Union Single Regulation and amends the rules of the Capital Requirements Regulation and the Bank Recovery and Resolution Directive.

Regulation (EU) No 575/2013 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes, together with Directive 2013/36/EU of the European Parliament and of the Council (the capital requirements or CRD), the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to strengthen the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with international EU partners EU, in particular within the Basel Committee on Banking Supervision (BCBS).

Resolution-related issues have been identified since the revised TLAC/MREL framework became applicable in 2019. The daisy-chaining proposal aims to address these issues.

The Council adopted its negotiating mandate on 21 December 2021. The European Parliament adopted its negotiating position in mid-February 2022. Trilogues between the co-legislators started on 31 March 2022 and concluded with the provisional agreement reached today.

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