The European Commission, Parliament and Council reached a much needed political agreement on the so-called ‘fast-track’ elements – IFRS 9, Large Exposures (LE) and Bank Creditor Hierarchy (BCH) – of the Risk Reduction Measures (RRM) package on 25 October. The political agreements saw the Parliament largely adopt the Council’s position across all files.
On IFRS 9 & LE, the Parliament accepted the Council’s position with the exception that the threshold applied to the dynamic top-up was lowered to 0%, which is akin to a static approach and something that the Parliament had been pushing for since the beginning of negotiations.
On the BCH, the Council and Parliament positions’ were so close it was hardly a surprise that a deal was reached during the first trialogue. Here again the Parliament largely adopted the Council’s position in exchange for clearer rules on the grandfathering of ‘non-preferred’ senior instruments and the transposition deadline at the latest on 1 January 2019 (when the new international FSB standards on total-loss absorbing capacity (TLAC) rules are due to apply).
Now it is up to the Council and Parliament to finalise their respective positions’ on the rest of the package, which is where the ‘real work’ will begin. Their positions will in no doubt be influenced by the European Central Bank’s (ECB) long awaited opinions (here and here) on the RRM package which were published on 10 November.
On the prudential front, the ECB supports the Commission’s rather limited approach on proportionality i.e. exclusively focussing on reporting. On other politically important topics the ECB sees the merit of an optional 2 intermediate parent undertaking (IPU) solution for third country banks’ EU operations.
The Central Bank generally supports the continued practice of cross-border waivers for prudential requirements on an individual basis. It also gives its opinion on the implementation of internationally agreed standards such as the leverage ratio, where it supports the introduction of a leverage ratio requirement in Union law and its calibration at 3 %.
On the resolution side, the ECB is pushing for extended moratorium powers that may be used in exceptional and specific circumstances in order to bridge the gap from the failing or likely-to-fail (FOLF) decision and resolution as well as expanding the scope of the moratoria to include, controversially, all deposits i.e. covered deposits. Additionally, the ECB is recommending the removal of MREL guidance and only extending the scope of TLAC to a sub-set of other systematically important institutions (O-SIIs), if at all.
Overall, a lot of work remains to be done on pillar 2 macro-prudential tools, home vs. host issues and moratorium powers, to name but a few issues. While the Commission would like to see the package signed off as early as mid-2018, a much likelier outcome would see a final deal being agreed towards the end of the Austrian Presidency in 2018, if not the beginning of the Romanian’s tenure in 2019. This is due to the large amount of highly political issues yet to be resolved.
The progress achieved during these past few weeks has been encouraging, but the fact remains greater hurdles will need clearing before the package as a whole can be signed off.