Examining the industry’s response to TLAC and MREL

Q1 – Gilles we look forward to your participation on the panel discussion alongside Goldman Sachs and Société Générale CIB at the TLAC and MREL 2017 Summit. The discussion will be centred on examining the industry’s response to initial proposals and practicalities of preparing. What uncertainties currently lie with implementation?

While the FSB established a clear framework for the issuance of TLAC instruments back in November 2015, the technical rules implementing the termsheet have been finalised in the US only at the end of December, and in Europe, the legislative process has just begun. For European banks, there remains thus considerable uncertainties as to the format of eligible instruments, the calibration of MREL, and the length of any transition period. Furthermore, there are still a few elements of the framework that are yet to be agreed at the FSB level, for instance in terms of internal TLAC and mutual recognition of resolution frameworks. At the more technical level, issues such as index eligibility of TLAC instruments, repo eligibilty, deliverability under CDS contract, capital deduction rules are all still under discussion.

Q2 – What do banks need to be aware of when implementing into European legislation?

They need to be aware of upcoming European legislation, and consider how they can future proof their issuance and retain some flexibility while achieving best pricing. It is also important to pay attention to local law requirements, for instance a TLAC Samurai bond may not necessarily be structured the same way as a TLAC bond issued under German law.

Finally, banks need to keep monitoring their existing stock of senior debt and capital instruments, to understand how future legislation could affect those.

Q3 – How can banks begin to accelerate their preparedness by increasing loss absorbing capacity?

The answer to this question depends on the jurisdiction you are talking about.

In the UK and Switzerland, banks are well advanced in their issuance plans to meet TLAC and MREL, having started large scale issuance programmes of holdco senior debt already 12 to 18 months ago.

In France, the issuance of senior non preferred debt started in December last year, so French banks now have to execute their issuance plans before the introduction of TLAC in 2019. Germany has juniorised the existing senior debt, but German banks need to refinance redemptions, so in that sense they are in the same boat as everyone else. For jurisdictions where no TLAC solution has been introduced, banks have various options: Retaining profits, issuing more Tier 2 capital, or perhaps even issue instruments in anticipation of the EU law, like Santander did recently.

Q4 – How have the regulatory frameworks for TLAC & MREL impacted treatment and issuing of instruments?

To the credit of the regulators, they have tried to accomodate existing banking models, with TLAC solutions available for both holdco and opco banking models, with additional work being done at the EU level to further harmonise the regulatory framework across jurisdiction. That work is already bearing fruits, as we see that pricing of TLAC instruments have to a large extent converged for holdco senior debt, French senior non preferred, or contractual “Tier 3” subordinated debt.

That said, at the EU level, the current proposals for the eligibility criteria of MREL debt go beyond those agreed in the TLAC termsheet, and it is important to reflect on whether such additional criteria are warranted.

Q5 – What other key topics do you expect to be at the forefront of the conversation between the panellists?

Disclosure requirements and communication strategy, impact of TLAC/MREL requirements on MDA (maximum distributable amount), subordination requirement/role of senior preferred, MREL calibration and timing, level playing field with the US, impact of Basel IV.. the topic is so vast we could talk for hours.

Q6 – What key challenges do you foresee for capital management professionals and teams over the next six to 12 months?

For capital managers, the key challenge in my view is to help banks to navigate the regulatory uncertainty during the legislative process. Innovative solutions will always be required, for instance with the development of tlac compliant instruments on a contractual basis ahead of any statutory solution, liability management exercises, or RWA optimisation solutions.