17 November 2023, 12:10
The Council adopted today a mandate to start negotiations with the European Parliament on the Daisy Chains proposal. Daisy chain is a term for a financial scam conducted by a group of investors in the public equities markets or in real estate.
The proposal is a targeted amendment of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) to address certain issues in relation to the treatment of ‘internal MREL’ in bank resolution groups.
Effective resolution
The BRRD requires banks and other credit institutions established in the EU to meet a minimum requirement for own funds and eligible liabilities (‘MREL’) to ensure an effective and credible application of the bail-in tool. Failure to meet MREL may negatively impact institutions’ loss absorption and recapitalisation capacity and, ultimately, the overall effectiveness of resolution.
Where an MREL instrument is issued by a subsidiary within a banking group and directly or indirectly subscribed by its parent company, it is referred to as ‘internal MREL’. The subsidiary must deduct its holdings of internal MREL from its own funds to ensure the integrity and loss absorbency of the MREL instruments.
New rules to avoid disproportionate effects
After analysis, the Commission found that the application of the deduction requirement on internal MREL could have a disproportionate detrimental impact for certain banking group structures, namely those operating under a parent holding company.
The Daisy Chains proposal aims 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 subsidiaries will not be obliged to deduct their individual holdings of internal MREL, thus preventing the detrimental effect identified by the Commission.
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 (conversion or write-down of MREL instruments).
On this basis and as a rule, liquidation entities would not be obliged to comply with an MREL requirement in excess of their own funds requirements, unless the resolution authority decides otherwise on a case-by-case basis for financial stability protection reasons.
The main changes agreed in the Council clarify the definition and scope of liquidation entities and provide further detail on the conditions for the application of the consolidated treatment of internal MREL.
Background and next steps
On the 18 April the European Commission adopted a legislative package known as the reform of the Crisis Management and Deposit Insurance framework (‘CMDI’) setting out amendments to Directive 2014/59/EU (the Bank Recovery and Resolution Directive or ‘BRRD’) and to Regulation (EU) No 806/2014 (the Single Resolution Mechanism Regulation or ‘SRMR’).
As part of the CMDI package the Commission also adopted a targeted amendment of the BRRD and of the SRMR as a separate legal instrument (the ‘Daisy Chains proposal’) to address specific issues on the treatment of ‘internal MREL’
The Daisy Chains proposal, was presented as a self-standing legal instrument for the co-legislators to fast-track its adoption ahead of the remainder of the CMDI review proposals.
- Council negotiating mandate for the Daisy Chains Directive
- Adoption note for the Council negotiating mandate for the Daisy Chains Directive
- Commission proposal on BRRD
- Commission proposal on SRMR
- Banking union (background information)
Source – EU Council