MNI INTERVIEW: SRB Working To Avert Post-Brexit MREL Shortfall

By David Thomas

     BRUSSELS (MNI) - The European Banking Union's bank resolution authority is

working with lenders to ensure they can address any shortfall in holdings of

bail-in-able securities after Brexit, should bonds issued under English law

become ineligible for requirements, Single Resolution Chair Elke Koenig told

MNI.

     Some banks have already taken steps to insert clauses in their English-law

bond issue documents to ensure that these can be bailed in under EU law in the

event of resolution, allowing them to count towards the minimum requirement for

own funds and eligible liabilities, or MREL, Koenig said in an emailed response

to questions.

     "In terms of potential shortfalls in MREL, we flagged this to banks early

on, so we expect them to act accordingly. We expect the banks to discuss their

funding strategies with the respective resolution teams and to propose

mitigating measures in case of shortfalls," she said.

     "Generally, the SRB is mindful, in line with other financial market

participants, of

     potential market volatility arising from a disorderly Brexit, particularly

with

     regard to the impact on bank funding. However, given the level of

preparedness,

     we do not see a serious risk of financial stability."

     --SEES NO RISK OF INSTABILITY

     The SRB head played down the risk of significant financial instability post

Brexit, even if the UK leaves the EU without a deal, and said she does "not see

a serious risk to financial stability".

     "Even in the case of a hard Brexit, cooperation with the UK would be

maintained, and a cooperation agreement has already been signed that would come

into force following the UK's withdrawal from the EU."

     Brexit aside, Koenig said she is not "naive" about the economic challenges

faced by some EU banks in making up remaining MREL shortfalls, which total about

E170 billion, or around 2% of total risk exposure.

     "Nevertheless, this should be no excuse for banks' management not working

towards resolvability and reaching their MREL targets. In this sense, banks have

made progress in issuing MREL-eligible instruments. In 2018 and the first

quarter of 2019, the issuance of MREL debt securities was proof that banks are

making progress".

     While the EU's SRM Regulation empowers the SRB to oblige banks to increase

their MREL to required levels if needed, Koenig notes: "This power has not been

used so far, but the SRB stands ready to intervene if it has to."

     Cooperation between banks and the SRB on building up MREL levels has been

"positive" and the SRB is "actively monitoring progress towards resolvability",

she said.

     Asked about the SRB's 2017 resolution of Spain's Banco Popular, which

occurred when the bank's capital was still significantly higher than the levels

set as the "trigger" for its Additional Tier 1 contingent convertible bonds, and

whether in future fundamentally solvent banks could be more likely to receive

injections of short-term funds, Koenig said liquidity support for solvent banks

was a matter for the central bank.

     "There are two triggers for a bank being considered failing or likely to

fail: solvency and liquidity. In the case of Banco Popular, it was liquidity

that led to the failing or likely to fail situation and we would act in the same

way today."

     Turning to progress on the EU's common backstop for bank resolutions,

Koenig said further work on "technical aspects" of the backstop should be

finalised in the second half of the year, after progress on the matter at the

June meeting of euro zone finance ministers.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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