Circular NBB_2022_21 of the Resolution College on the methodology and assessment criteria used to decide whether the specific MREL requirement for top-tier institutions should be applied to a non-top-tier institution

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Circular

Brussels, 19 September 2022

Reference: NBB_2022_21

your correspondent:
Grégory Nguyen tel. +32 2 221 55 17 gregory.nguyen@nbb.be

Circular of the Resolution College of the National Bank of Belgium on the methodology and assessment criteria it uses to decide whether the specific MREL requirement for top-tier institutions should be applied to a non-top-tier institution

Scope

This circular applies to entities to be resolved that do not fall under Article 92bis of Regulation (EU) No 575/2013¹ and that are part of a resolution group whose total assets amount to less than EUR 100 billion.

Summary/Objective

Article 45quater, paragraph 6 of Directive 2014/59/EU², as transposed into Article 267/5/1, § 5 of the Act of 25 April 2014³ and into Article 279 of the Act of 20 July 2022⁴ jointo Article 267/5/1, § 5 of the Act of 25 April 2014 and Article 12quinquies, paragraph 5 of Regulation (EU) No 806/2014⁵ provides for the possibility for national resolution authorities to apply the specific MREL requirement for top-tier institutions to a resolution entity that is part of a resolution group whose total assets amount to less than EUR 100 billion, or to request the Single Resolution Board to do so. This circular aims to clarify the methodology and criteria used by the Resolution College to assess the need to use this possibility for an institution governed by Belgian law or for its parent company governed by Belgian law.

Structure

1. Introduction
2. Definitions
3. Methodology and assessment criteria

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1 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.
2 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council.
3 Act of 25 April 2014 on the status and supervision of credit institutions.
4 Act of 20 July 2022 on the status and supervision of listed companies.
5 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the context of a single resolution mechanism and a single resolution fund and amending Regulation (EU) No 1093/2010.

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Dear Madam,
Dear Sir,

Part 1. Introduction

1. The European resolution framework imposes on all credit institutions and investment firms established in the European Union and, where applicable, on their parent companies, the obligation to comply with an MREL requirement. Directive 2014/59/EU, as transposed into Belgian law, and Regulation (EU) No 806/2014 establish a specific MREL requirement for globally systemically important institutions and for top-tier institutions. A non-top-tier institution must comply with this specific requirement, unless its national resolution authority considers that its failure would likely pose a systemic risk. In that case, this authority may decide to apply the specific MREL requirement for top-tier institutions to it or request the Single Resolution Board to do so.

2. In accordance with Article 3 of the Royal Decree of 22 February 2015 laying down the rules on the organisation and functioning of the Resolution College, the conditions for the exchange of information between the Resolution College and third parties and the measures to be taken to avoid conflicts of interest, the Resolution College clarifies with this circular its practice regarding the application of the specific MREL requirement for top-tier institutions. This circular describes in particular the methodology and criteria used by the Resolution College to determine whether the specific MREL requirement for top-tier institutions should be applied to a non-top-tier institution.

Part 2. Definitions

3. For the purposes of this circular, the following definitions apply:

a. Resolution College: the Resolution College of the National Bank of Belgium established by Article 21ter of the Act of 22 February 1998 laying down the organic statute of the National Bank of Belgium;

b. Resolution planning cycle: the annual or biennial cycle during which the resolution plan and the MREL decision of an institution are updated;

c. Institution: a credit institution or an investment firm;

d. Communication 2020/C 417/02: Commission communication on the interpretation of certain legal provisions of the revised bank resolution framework in response to questions from Member State authorities (second Commission communication) (2020/C 417/02);

e. MREL requirement: the minimum requirement for own funds and eligible liabilities, as defined in Subsection 2 of Section IV/1 of Chapter V of Title VIII of Book II of the Act of 25 April 2014 or in Article 12 of Regulation (EU) No 806/2014;

f. Non-top-tier institution: a resolution entity that does not fall under Article 92bis of Regulation (EU) No 575/2013 and that is part of a resolution group whose total assets amount to less than EUR 100 billion;

g. Directive 2014/59/EU: Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council;

h. Specific MREL requirement for top-tier institutions: the MREL requirement specifically applicable to top-tier institutions pursuant to Article 267/5/1, § 4, jointo Article 267/5, §§ 4 and 7

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of the Act of 25 April 2014 or Article 12quinquies, paragraph 4, jointo Article 12quater, paragraphs 4 and 7 of Regulation (EU) No 806/2014;

i. Top-tier institution: a resolution entity that does not fall under Article 92bis of Regulation (EU) No 575/2013 and that is part of a resolution group whose total assets amount to more than EUR 100 billion;

j. Regulation (EU) No 806/2014: Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the context of a single resolution mechanism and a single resolution fund and amending Regulation (EU) No 1093/2010;

k. Act of 25 April 2014: the Act of 25 April 2014 on the status and supervision of credit institutions;

l. Act of 20 July 2022: the Act of 20 July 2022 on the status and supervision of listed companies and containing various provisions; and

4. For terms not defined above, reference is made to the definitions in Articles 3, 4 and 242 of the Act of 25 April 2014.

Part 3. Methodology and assessment criteria

5. The Resolution College determines in three steps whether the specific MREL requirement for top-tier institutions should be applied to a specific non-top-tier institution. In the first step, it is determined whether the exercise condition of Article 45quater, paragraph 6 of Directive 2014/59/EU, as transposed into Belgian law, or of Article 12quinquies, paragraph 5, of Regulation (EU) No 806/2014 is met. In the second and third phases, the proportionality of such a decision is assessed jointly.

a. In a first step, it is assessed whether the exercise condition of Article 45quater, paragraph 6 of Directive 2014/59/EU, as transposed into Belgian law, or of Article 12quinquies, paragraph 5 of Regulation (EU) No 806/2014 is met. Each of these articles can only be applied if the national resolution authority considers that the failure of the relevant non-top-tier institution would likely pose a systemic risk. The European Commission has confirmed in its communication (2020/C 417/02) that the main factor in the resolution authority's decision to apply the specific MREL requirement for top-tier institutions or to request its application is the assessment of whether the relevant non-top-tier institution would likely pose a systemic risk in the event of failure. In the first step of the methodology, it is therefore examined whether the failure of the relevant non-top-tier institution could have systemic consequences.

b. When the first step concludes that the failure of a non-top-tier institution would likely pose a systemic risk, the second step of the methodology examines whether it is necessary to apply the specific MREL requirement for top-tier institutions to the relevant institution. The assessment under this second step is not carried out if the first step concludes that the exercise condition of Article 45quater, paragraph 6 of Directive 2014/59/EU, as transposed into Belgian law, or Article 12quinquies, paragraph 5 of Regulation (EU) No 806/2014 is not met.

c. When the second step concludes that it is necessary to apply the specific MREL requirement for top-tier institutions to the relevant non-top-tier institution, the third step of the methodology is intended to complete the assessment of whether this requirement is proportionate to the objectives pursued, in light of three specific criteria set out in Article 45quater, paragraph 6 of Directive 2014/59/EU, as transposed into Belgian law, or in Article 12quinquies, paragraph 5 of Regulation (EU) No 806/2014. The national resolution authority must assess each of these criteria and determine whether they constitute any obstacle to the application of the specific MREL requirement for top-tier institutions. The assessment under this third step is not carried out when the

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Resolution College in the second step concludes that it is not necessary to apply the specific MREL requirement for top-tier institutions to the relevant institution.

6. To ensure equal conditions for all institutions governed by Belgian law, the Resolution College applies this methodology to every non-top-tier institution governed by Belgian law during the resolution planning cycle.

Step 1 – Exercise condition

7. The Resolution College examines whether the relevant non-top-tier institution would likely pose a systemic risk in the event of failure. This does not require a systematic or detailed assessment of all direct and indirect systemic consequences that the failure of the relevant non-top-tier institution could have. The Resolution College's assessment may be based on conclusions from analyses carried out in other contexts or on decisions by other authorities. For example, the Resolution College may rely on:

a. assessments carried out by the macroprudential authority or on decisions by that authority. Thus, based on the qualification of an institution as a domestic systemically important institution by the macroprudential authority in accordance with Article 12 of Annex 4 to the Act of 25 April 2014, it can be concluded that the failure of the resolution group to which the non-top-tier institution belongs would have a significant impact on Belgium and the market and economy of one or more other Member States and on the global financial market; or

b. the public interest test carried out as part of the resolution plan, which assesses the extent to which the failure of a non-top-tier institution and its winding up under normal insolvency proceedings would undermine the resolution objectives. When the public interest test is satisfied because the winding up of the non-top-tier institution under normal insolvency proceedings cannot guarantee the continuity of critical functions or avoid serious adverse effects on financial stability, in particular by preventing contagion, it can be concluded that the failure of the relevant non-top-tier institution would likely pose a systemic risk.

The mere presence of a critical function can also lead to the conclusion that the failure of the relevant non-top-tier institution would likely pose a systemic risk, insofar as a critical function is defined as an activity, service or operation whose interruption is likely to lead to a disruption of services essential for the real economy or financial stability in Belgium or in one or more other Member States, due to the size, market share, interconnection with entities within and outside the group, complexity or cross-border activities of the institution or the group of which it is a part, with particular attention to the substitutability of those activities, services or operations.

8. The Resolution College's assessment of the potential systemic risk can also be confirmed by the effect that the winding up under normal insolvency proceedings of a non-top-tier institution would have on the Deposit Guarantee Fund, in particular when covered deposits are significantly higher than the intervention reserve for credit institutions and listed companies deployed by the Deposit Guarantee Fund.

Step 2 - Necessity to apply the specific MREL requirement for top-tier institutions to a non-top-tier institution

9. The necessity to apply the specific MREL requirement for top-tier institutions to a non-top-tier institution depends on a number of factors and in particular the effect such a decision would have. In assessing this necessity, account is taken of the MREL requirement already applicable:

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a. When the specific MREL requirement for top-tier institutions is lower than the MREL requirement already applicable to a non-top-tier institution, and provided there are no indications that the situation could change in the short or medium term, it is not necessary to apply the former requirement to this institution, as such a decision would have no effect. To assess the effect of its decision, the Resolution College takes into account all components of the MREL requirement already applicable to the relevant non-top-tier institution, including all requirements that must be met using own funds or structurally or contractually subordinated eligible instruments.

b. In addition, the Resolution College assesses whether the MREL requirement already applicable to the relevant non-top-tier institution allows reaching the loss absorption and recapitalisation thresholds referred to in Article 37, paragraph 10 and Article 44, paragraph 5 of Directive 2014/59/EU using own funds or structurally or contractually subordinated eligible instruments. When this is not the case, or when there are indications that this might no longer be the case in the short or medium term, and there is a risk that depositors or other unsecured creditors as referred to in Article 389/1, 1° of the Act of 25 April 2014 will have to absorb losses or participate in a recapitalisation to reach these thresholds, the Resolution College may conclude that it is necessary to apply the specific MREL requirement for top-tier institutions to the relevant institution.

Step 3 – Specific proportionality criteria

10. In accordance with Article 45quater, paragraph 6 of Directive 2014/59/EU, as transposed into Belgian law, and Article 12quinquies, paragraph 5 of Regulation (EU) No 806/2014, the national resolution authority, when it decides to apply the specific MREL requirement for top-tier institutions to a non-top-tier institution or to request the application of this requirement, takes into account three criteria that help ensure that this decision is proportionate to the objectives pursued and takes into account the characteristics of the relevant non-top-tier institution, namely:

a. The predominance of deposits and the lack of debt instruments in the funding model: this criterion, assessed cumulatively, examines the extent to which the funding of the non-top-tier institution takes place exclusively via deposits, or whether it also depends on debt instrument markets. A predominance of deposits does not constitute an obstacle to the application of the specific MREL requirement for top-tier institutions, provided it is demonstrated that the relevant institution can issue debt instruments on the markets. The maintenance of a debt instrument issuance programme or the issuance of debt instruments in the past, possibly via a vehicle, a subsidiary of the non-top-tier institution or its parent company, is sufficient to demonstrate that the non-top-tier institution can issue debt instruments;

b. The extent to which access to capital markets for eligible liabilities is limited: this criterion directly assesses the extent to which it is demonstrated that the relevant institution has access to markets for eligible debt instruments. The maintenance of a programme for the issuance of eligible debt instruments or the issuance of debt instruments in the past, possibly via a vehicle, a subsidiary of the non-top-tier institution or its parent company, is sufficient to demonstrate that the non-top-tier institution can issue eligible debt instruments; and

c. The extent to which the resolution entity must rely on Tier 1 core capital to meet the MREL requirement: as with the previous criterion, this criterion assesses, this time indirectly, the extent to which it is demonstrated that the relevant institution has access to markets for eligible debt instruments. This criterion must be assessed in combination with the previous criterion. The funding of the MREL requirement via Tier 1 core capital exclusively could constitute an obstacle to the application of the specific MREL requirement for top-tier institutions if this situation is mainly the result of an inability to access markets for eligible debt instruments.

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11. The Resolution College does not apply the specific MREL requirement for top-tier institutions to a non-top-tier institution when this requirement is not proportionate in light of these three criteria. As the European Commission has indicated in its communication (2020/C 417/02), this conclusion should not be taken automatically and must depend on the specific situation of the concrete case.

Yours faithfully,

[Signature]

Pierre Wunsch
Chairman of the Resolution College

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