Determination of the recapitalisation amount of MREL (in the RTS on MREL)

The RTS says (article 2, paragraph 6,7,8): "6. The capital requirements referred to in paragraph 5 shall include the following: (a) own funds requirements pursuant to Articles 92 and 458 of Regulation (EU) No 575/2013, which include: (i) a CET1 capital ratio of 4.5% of the total risk exposure amount; (ii) a Tier 1 capital ratio of 6% of the total risk exposure amount; (iii) a total capital ratio of 8% of the total risk exposure amount; (b) any requirement to hold own funds in excess of the requirement listed in point (a) of this paragraph , in particular pursuant to point (a) of Article 104(1) of Directive 2013/36/EU; (c) the Basel I floor according to Article 500 of Regulation (EU) No 575/2013; (d) any applicable leverage ratio requirement. 7. The recapitalisation amount shall also include any additional amount that the resolution authority considers necessary to maintain sufficient market confidence after resolution. 8. The default additional amount shall be equal to the combined buffer requirement, as specified in Chapter 4, Section 1 of Directive 2013/36/EU which would apply to the institution after the application of resolution tools." These paragraphs are not entirely clear on how the market confidence buffer should be articulated with the components of 6.(a),(b),(c) and (d). In particular, if a bank’s Basel 1 floor (or leverage ratio) requirement is higher than the sum of 6(a)+(b), and if a market confidence buffer (say the combined buffer) is required by the Resolution Authority, is the recapitalisation amount equal to the sum of the Basel 1 floor/Leverage requirement AND the combined buffer requirement? Or is the recapitalization amount equal to the higher of I)the sum of requirements (6a+6b) and the combined buffer and ii)the Basel 1 floor or leverage requirement?

Whether or not the Resolution authority decides that a market confidence buffer (that could be equal to the combined buffer requirement) should form part of the recapitalization amount is a matter of policy for the Resolution Authority. However, if there is to be a market confidence buffer as part of the recapitalization amount, it is very important to clarify whether or not it will come on top of the Basel 1 floor or leverage requirement. Given that the Basel 1 floor and the leverage ratio are metrics that have been designed as backstop to the risk sensitive capital requirements, there is no reason to require that an institution is recapitalized to an amount equal to the sum of Basel 1 floor/leverage requirement and the combined buffer. Indeed, this interpretation would not be in line with the way that own funds capital requirements are articulated in the CRR and CRD IV. The Combined buffer requirement is detailed in article 128 onwards of the CRD, and states very clearly that the buffers come on top of "the Common Equity Tier 1 capital maintained to meet the own funds requirement imposed by Article 92 of Regulation (EU) No 575/2013" (see for instance article 129 for the capital conservation buffer). Article 92 only requires institutions to maintain the minimum requirements of 4.5% CET1, 6% Tier 1 and 8% Total capital, and does not mention the Basel 1 floor, which is only mentioned in article 500. It follows therefore that the combined buffer of article 128 of CRD does not come on top of the Basel 1 floor of article 500. The logic is even clearer in the case of leverage ratio which is a metric for which clearly the combined buffer of CRD does not apply. In fact this is why the possibility of adding a "leverage ratio buffer" directly in the leverage requirement is currently being discussed in Basel and the EBA. If such leverage ratio buffer was to be introduced, surely it would not make sense to add on top of that the combined buffer set on the basis of risk weighted assets.