EU updates bank prudential rules

Debt Issuance from 2020: Themes for the year ahead

Following a lengthy period of intense negotiation between the EU Council, Parliament and Commission, the prudential regulation measures contained in the amendments to (i) the Capital Requirements Regulation (“CRR2”); (ii) the Capital Requirements Directive V (“CRDV”); (iii) the Banking Recovery and Resolution Directive (“BRRD2”); and (iv) the Single Resolution Mechanism Regulation (“SRMR 2”) were published in the Official Journal in June 2019.

Although this new package of measures establishes complex transition arrangements and a reasonably lengthy implementation timeframe we will continue to see the phased impact of some of these new provisions in 2020. Once fully applicable, these reforms as a whole will have a significant impact on banks and may increase capital requirements for certain institutions.

So why the need for BRRD2 so soon after implementation of BRRD?

Part of the reason is to bring EU rules on minimum requirements for own funds and eligible liabilities (“MREL”) into conformity with the international standard for global systemically important banks (“G-SIBs”) on total loss absorbing capacity (“TLAC”), applicable since early 2019, and from which the EU’s MREL standard differed in some respects. Also, in the short time that the BRRD had been in full operation, some provisions (particularly the “Article 55” requirement to include contractual recognition of bail-in clauses in contracts governed by non-EU law) had already proved themselves to be onerous and in need of reform.

BRRD2 and CRR2 bring EU rules on loss absorbency in resolution in line with international standard for G-SIBs. However, in fixing minimum levels of MREL and subordination for a wide range of non-G-SIBs, the EU has gone further than the international standard. National discretion to increase levels of subordination (for example in the UK) could also lead to divergent regimes, especially outside the euro area.

The new rules, coupled with the end of the grandfathering period applicable to some legacy capital instruments under the original CRR and the expiry of the five year non-call period on many first-generation CRR-compliant instruments, may prompt a wave of new issuance by EU banks in the months ahead.

For further information on the detailed provisions of CRR2 and CRDV see our client note “CRR2 and CRDV – The New Prudential Regulatory Landscape” and for an overview of the revisions to BRRD and MREL see our client note “BRRD2 and the revised MREL framework”.