New requirements to help protect taxpayer funds and ensure efficient bank crisis management
At the end of 2019, in order to safeguard public funds and ensure the stability of Lithuania’s financial system, for the first time binding minimum requirements for own funds and eligible liabilities (MREL) were imposed on three systemically important Lithuanian banks – AB SEB, AB Swedbank and AB Šiaulių bankas. In case of any difficulties, these requirements will enable the banks to absorb incurred losses and continue their activities.
“This is an important achievement for Lithuania’s financial system: after a certain transitional period, in the event of a crisis, if necessary, the major Lithuanian banks will be resolved without using taxpayer funds – all losses will be covered by their shareholders and other large creditors”, said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
The total amount of MREL set for the three systemically important banks and their remaining MREL gap are €2,134 million and €601 million respectively, comprising 11.17% and 3.15% of their total liabilities and own funds recorded at the end of 2018.
The two major banks (AB SEB and AB Swedbank) will have to meet their MREL targets in 2020, while AB Šiaulių bankas – within four years (by the end of 2023). None of the banks indicated seeing any potential difficulties in achieving their MREL targets. In case of the two major Swedish-capital banks, the most logical and simple way to meet them would be issuance of subordinated liabilities to their parent banks.
The MREL is the total amount of two components: a loss absorbing amount and a recapitalisation amount, necessary to enable banks to continue their activities and perform critical functions for the country’s economy after resolution. This may be achieved by writing down all or part of the bank’s own capital and/or eligible liabilities as well as converting eligible liabilities into capital instruments.
Bank resolution, crisis preparedness planning and setting the MREL targets is a long-term process that falls under the responsibility of the resolution authorities that update bank resolution plans and review the MREL targets on an annual basis.
The resolution authorities of all countries where a banking group operates through the establishment of a branch or a subsidiary and the Single Resolution Board (which is the central resolution authority of the banking union, i.e. the euro area) are involved in the resolution planning process and activities of resolution colleges of such cross-border banking groups operating in Lithuania and other countries.
“The Bank of Lithuania, acting as the country’s national resolution authority, has been actively cooperating with the Single Resolution Board and resolution authorities of the Nordic-Baltic states, seeking to ensure resolution of banking groups operating in Lithuania in the event of a crisis. Cross-border cooperation between the resolution authorities was also tested during the Nordic-Baltic financial crisis simulation exercise,” said Tomas Garbaravičius.