Reviewing final rule for TLAC/MREL requirements and assessing implementation

Reviewing final rule for TLAC/MREL requirements and assessing implementation

By Gilles Renaudiere, Director, Capital Products, BNP Paribas

Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I work in the Capital Products team at BNP Paribas, where I have been for the last 5 years, and i was at another London based bank for 8 years prior to that. My role is to advise banks, insurance companies and corporates in their issuance of hybrid capital securities, and of course more recently TLAC and MREL debt instruments as well.  The main part of the job is the structuring of instruments that meet the requirements of the regulators, auditors, rating agencies, and of course investors and issuers. It can sometimes be a bit of a balancing act to juggle the needs and interests of all these stakeholders! We also play a large part in the execution of the transactions, liaising with lawyers to coordinate the documentation, and helping issuers with their messaging and marketing effort.  In addition to that, we try to help clients navigate the maze of current and future regulatory environment, and therefore provide more strategic advice on the optimisation of capital structure and funding plans. It is enough to keep us busy!

What, for you, are the benefits of attending a conference like the Risk EMEA 2019 and what can attendees expect to learn from your session?

For me the main benefit is to meet and interact with a large range of risk specialists to gain a broader perspective of things. At the end of the day, liquidity risk, interest rate risk, regulatory risk, capital and many other factors all play a role in determining the funding and capital structure of financial institutions and you just can’t box yourself in your narrow field of expertise or otherwise you’ll miss the bigger picture.

On my side, I’ll aim to provide a state of play on the MREL and TLAC regulations, how banks have adapted to this new regime, and what are the remaining challenges and risks.

Do you think there will be any variation in the way resolution authorities will implement the final rule?

That is one of the risks that banks are faced with because it raises obvious level playing field issues. There are a few areas that we need to pay attention to in this respect, such as the calibration of mrel/tlac requirements and the type of instruments eligible. Within the Eurozone, you would expect a fairly consistent application of the rules, and within the broader EU, the overall resolution regime is underpinned by EU legislation that should support level playing fied, but of course with regional variations. But we will also have to look beyond Europe and look at how US and Asian banks are affected. The Financial Stability Board is already planning to review the TLAC space on a global basis so that will be a good opportunity to take stock of the differences in implementation. There is also a Brexit angle here, if the EU and the UK continue to have aligned resolution regime, we may one day see emerge a framework for mutual recognition of bail-in between the UK and the EU. And that would make life easier for everyone!

Do you anticipate volatility within the market because of TLAC & MREL? If so, how?

So far, markets have absorbed remarkably well the issuance of these new TLAC/MREL debt instruments, and that is really testament to the really hard work done by banks in terms of investor education, work with rating agencies, bond index providers, credit default swap market participants etc.. that ensured that the market really took off nicely in broader market conditions that have seen a fair amount of volatility, especially towards the end of last year.

That said, it is still a relatively new market, a lot more debt needs to be issued, and the regulatory landscape is still evolving.  In particular, the regulatory response towards banks that would not able to issue MREL instruments will be absolutely key. If regulators are too severe, they risk spooking out investors and shut the broader market, and if they are too lax, bank resolvability would be put in a question. That in my view will be a key driver on how volatility will affect this market going forward.

What are the main challenges or opportunities you foresee when re-shaping the balance sheet?

For the banking industry as a whole, the biggest challenge will undoubtedly be to preserve the net interest margin while meeting the TLAC/MREL requirements, especially in a context where rates stubbornly remain low.  For some, TLAC/MREL may well change the structure of balance sheet further, especially those with little wholesale funding outstanding to start with. And those banks that succeed in transforming their balance sheet in a cost effective way will of course gain a great competitive advantage, so that’s the obvious opportunity there.

Going forward, what are the key considerations for those preparing for implementation?

The key consideration when thinking about a MREL strategy these days is the preparation of the funding plan in light of all the regulatory uncertainty in terms of timing, amount and type of MREL debt required. In this context, it makes sense for banks to build up their MREL resources in a gradual manner, not too fast in order to avoid frontloading all the costs, but not too slowly to ensure that requirements are met ahead of deadlines. Additional considerations include getting the right currency mix, and maturity profile, and of course having the right marketing strategy in order to maximise investor demand.

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