Assessing constraints and opportunities ahead of TLAC & MREL final rule, implementation and constrictions

Assessing constraints and opportunities ahead of TLAC & MREL final rule, implementation and constrictions

During the financial crisis many financial institutions which had once been perceived as adverse to even the most extreme economic scenarios, were on the brink of collapse. In an escalating turn of events in 2007/2008, the world watched on as these multi-national organisations threatened the global economy. Arguably one of the vital lessons learned from the financial crisis was the need for recovery and resolution planning to provide optimal stability for individual institutions and the global market. The TLAC (Total Loss Absorbing Capacity) requirement applies to all Globally Systemically Important Banks (GSIB’s) which have been described as too big to fail, the aim of the new standard is to hold higher Tier 1 capital reserves in preparation for future stress scenarios. MREL (Minimum Requirement of Eligible Liabilities) has similar objectives but instead applies to a broader range of financial institutions. With MREL phase set for 2019 and TLAC for 2020 we have now entered a critical stage to meet the final requirements. Key issues regarding opportunities and constraints in the run up to full implementation will be explored at the Center for Financial Professionals upcoming TLAC & MREL summit in London across 25-26 April, 2017

Speaking to over 40 industry experts highlighted some of the upcoming challenges expected before full implementation of TLAC and MREL. As we enter this essential stage of planning many have raised concerns over what the final requirements will look like and how this will impact preparation and planning in the final year. Although it is still unknown what the full extent of the regulations will be we can now consider and debate what features to include in the final implementation. Industry experts have advised to take pre-emptive steps to accommodate for potential changes to the regulation, failing to prepare early on could leave some institutions unable to meet the final requirements. However on the other hand if the requirements proceed to change at a later date institutions may have wasted valuable time and resources preparing for elements which are incorrect. Benchmarking within the industry is essential at this stage of the project to identify if there is a common approach to planning and preparation. It could be suggested that over the coming months more information will come to light on how GSIB’s are preparing for this, potentially this could set the standard for other financial institutions.

Another area of concern is the variations in approaches to the new standard on a local, national and global level. Many countries/nations will have their own approaches which could impact the implementation of the new standards. Variations in areas such as instrument requirements, pricing of bonds, legal stand points and timelines may cause serious problems for those financial institutions which operate across multiple jurisdictions. The potential challenge set for most international banks is satisfying regulators in all jurisdictions and preventing conflict between the home and host nations.  Many have been left to ask whether we will ever have a unified response to the new standard and what potential difficulties these variations could cause post implementation. Industry experts have also argued that allowing these variations to continue could create an un-level playing field and give some financial institutions a competitive advantage. The Center for Financial professional’s upcoming TLAC and MREL summit has provided a platform to discuss the variations in approaches across Europe. This platform will allow several of the industry’s leading experts to discuss and debate some of the technicalities, impacts and possible outcomes that these variations will cause.

Another key issue in relation to TLAC and MREL is the impact of market dynamics on the ability to buy and sell TLAC and MREL. Seeing as MREL is applicable to all financial institutions we could see a saturated market if all parties decide to issue at the same time. This could potentially cause reduced investor appetite and dramatically affect the ability to buy and sell across the market. Several industry experts have suggested that this is an element which regulators may have overlooked and as a result can offer little guidance. Once again we could see tension as variations in approaches could allow certain financial institutions to gain a competitive advantage and offer more appealing rates within the global market. The un-level playing field could lead to a pricing conflict, however tight regulations in certain jurisdictions may prevent certain financial institutions from competing. Another element to consider in relation to the market dynamics is the depth of the sterling market and what this will mean for issuers. Due to recent events the rate of sterling has been very turbulent and it is currently difficult to predict how these rates will stand post and pre implementation of TLAC and MREL. With everyone heading to market at once accompanied by uneven competitive advantages and volatile sterling rates, market conditions are a serious challenge to consider when planning for full implementation of TLAC and MREL.

The issues discussed above bring into question whether financial institutions and regulators are fully prepared for the upcoming implementation of TLAC and MREL. Many industry experts believed that at this stage of the project it would be a smooth transition from planning to practical implementation, however there are still several challenges such as the ones previously discussed which are still outstanding. Arguably financial institutions can strengthen their position through planning and preparation, however aspects such as variations in approaches across jurisdictions and market constraints are issues for the wider market.  Undoubtedly TLAC and MREL is a continuously developing topic which has created lively debate within the capital sphere and is set to be a hot talking point for many months to come.

The Center for Financial Professionals upcoming TLAC and MREL summit (25-26 April, 2017) aims to explore some of the opportunities and constraints associated with TLAC and MREL post implementation. The conference will provide a platform for some of the industry’s most highly regarded experts to discuss their experiences and answer some of the topical questions associated with the new standards.