AT1 Coupon cancellation risk: consequences of MREL and TLAC breaches

Author: | Published: 16 Feb 2015

By Julian Burkhard, Head of Capital Solutions, Crédit Agricole CIB and Stefano Rossetto, Capital Solutions, Crédit Agricole CIB

The consultation of the Financial Stability Board (FSB) on the total loss absorbing capacity (TLAC) term sheet proposal ended on February 2 2015. The framework, which responds to the FSB’s 2010 agenda for addressing the systemic and moral hazard risks associated with the so-called "too-big-to-fail" problem, will apply an internationally agreed loss-absorbing capacity standard to global systemically-important banks (G-SIBs).

In the EU, loss absorbency capacity in resolution is regulated by the Bank Recovery and Resolution Directive (BRRD) in the form of a minimum requirement for own funds and eligible liabilities (MREL). The BRRD was finalised in 2014, and EU member states were expected to transpose it by January 1 2015, with MREL to apply from January 1 2016, unless brought forward.

While the TLAC and the MREL frameworks share common objectives,...