The proposal is targeted amendment of the Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism Regulation (SRMR) to include targeted proportionality requirements to treatment of internal MREL in bank resolution groups.
Part of EBU reform of crisis management and deposit insurance (CMDI) framework.
BRRD requires banks and other credit institutions established in EU to meet minimum requirement for own funds and eligible liabilities (MREL) to ensure effective bail-in tool.
Failure to meet the MREL may negatively impact an institutions' loss absorption and re-capitalisation capacity; ultimately, it may affect overall effectiveness of resolution.
Where an MREL instrument is issued by subsidiary within a banking group and directly or indirectly subscribed by its parent company, it is referred to as an internal MREL.
Under indirect subscription, intermediate subsidiary must deduct holdings of internal MREL from its own funds to ensure integrity and loss absorbency of MREL instruments.
New Rules
After analysis, EC found the application of the deduction requirement on internal MREL could have a disproportionate detrimental impact for certain banking group structures, namely those under parent holding company and some operating company structures.
The Daisy Chains proposal aims to give the resolution authorities the power of setting an internal MREL on a consolidated basis, but will be all subject to certain conditions.
Where the resolution authority allows a banking group to apply such consolidated treatment, the intermediate subsidiaries will not be obliged to deduct their individual holdings of internal MREL, thus preventing one of detrimental effects identified by EC.
In addition, the proposal introduces a specific MREL treatment for liquidation entities.
Those are defined as entities within a banking group earmarked for winding-up in accordance with insolvency laws, which would, therefore, not be subject to resolution action, or for the conversion or write-down of MREL instruments.
As a rule, liquidation entities would not be obliged to comply with MREL requirements, unless a resolution authority decides so for any financial stability protection reasons.
The own funds of liquidation entities issued to intermediate entities will not need to be deducted except if they represent material share of own funds and eligible liabilities.
Provisional text agreed by EU CNCL and EP clarify the concept and scope of liquidation entities and provide detail on conditions for application of treatment of internal MREL.
EU CNCl reached agreement on the proposal on Nov. 17, 2023, and the Daisy Chains proposal, was presented as a self-standing legal instrument for the co-legislators to fast-track its adoption, ahead of all of the remainder of the CMDI review proposals.
Next Steps
The agreement made is provisional and needs to be confirmed by member States’ representatives in Committee of permanent representatives (COREPER) and by EP.
Once endorsed, legal text will be consolidated and formally voted in EP and EU CNCL.
The text will then be published in the Official Journal and enter into force 20 days later, before then applying six months after date of entry in force, to provide for planning.
Dec. 25, 2023 EU CNCL Offer Letter to EP
On Dec. 25, 2023, EU CNCL issued information note attaching offer letter to EP ECON.
Follows Dec. 15, 2023, note on the final compromise text with view to an agreement.
Feb. 27, 2024 EP Adopted Text
On Feb. 27, 2024, EP adopted its first reading position on the proposal for a directive.
Feb. 29, 2024 EU CNCL Note
On Feb. 29, 2024, EU CNCL issued information note on outcome of EP first reading.
When it voted on Feb. 27, 2024, plenary adopted compromise amendment (no. 2).
The Commission's proposal as thus amended constitutes the Parliament's first-reading position which is contained in its legislative resolution as set out in the Annex to note.
Parliament's position reflects what had been previously agreed between institutions.
The Council should therefore be in a position to approve the Parliament's position.
Act would then be adopted in the wording which corresponds to Parliament's position.
Mar. 18, 2024 EU CNCL Proposed Adoption
On Mar. 18, 2024, EU CNCL issued item note on the proposed adoption of the act.
On Feb. 27, 2024 the EP had adopted its position at a first reading on the EC proposal.
The outcome of voting in the European Parliament reflects the compromise agreement reached between the institutions and should, therefore, be acceptable to the EU CNCL.
The Permanent Representatives Committee asked to confirm agreement and suggest EU CNCL approved the EP's position, as set out in PE-CONS 94/23, at next meeting.
If EU CNCL approved the EP's position, then the whole legislative act will be adopted.
After being signed by Presidents of the European Parliament and of the Council, the legislative act will then be published within the Official Journal of the European Union.
Mar. 26, 2024 EU CNCL Adoption
On Mar. 26, 2024, EU CNCL confirmed the adoption of the daisy chains directive.
Document dated Mar. 26, 2024, was received on Mar. 27, 2024 due to a fixed feed.
Daisy Chains directive sets out concept and scope of liquidation entities and provides the conditions for the application of the consolidated treatment of internal MREL.
New rules aim to give the resolution authorities the power of setting internal MREL on a consolidated basis subject to certain conditions.
Where the resolution authority allows a banking group to apply such consolidated treatment, the intermediate subsidiaries will not be obliged to deduct their individual holdings of internal MREL, thus preventing the detrimental effect identified by the EC.
In addition, the new rules introduce a specific MREL treatment for liquidation entities.
Those are defined as entities within a group earmarked for winding-up in accordance with insolvency laws, which would, therefore, not be subject to resolution action.
On this basis, liquidation entities will not be obliged to comply with an MREL requirement, unless the resolution authority decides otherwise on case-by-case basis.
The text will now be published in the Official Journal and enter into force 20 days later.
Document dated Apr. 11, 2024, received from EU CNCL Apr. 15, summarized Apr 17.
Apr. 22, 2024 Official Journal
On Apr. 22, 2024, EU CNCL issued final Dir 2024/1174, of Apr. 11, 2024, in the EU OJ.
By Nov. 13, 2024, Member States shall adopt and publish the measures necessary to comply with Article 1; they shall apply those measures from Nov. 14, 2024.
Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union; article 2, points (1) and (2), shall apply from Nov. 14, 2024; article 2, point (3), shall apply from May 13, 2024.
