ALM, FAIR VALUATION AND BALANCE SHEET OPTIMISATION

Jean-François Deschamps – February 2021

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 INTRODUCTION
Course Outline

PART 1 – Asset and Liability Management

1. Introduction
2. Interest Rate Risk
3. Liquidity Risk
4. Transfer Pricing System
5. Commercial margins

PART 2 – Financial Instruments Valuation

1. From IAS 39 to IFRS 9 – key business and financial implications
i. IAS 39
ii. IFRS 9 Module 3
2. Fair value credit and funding charges
i. General introduction
ii. CVA, DVA, FVA, MVA

PART 3 – Minimum Requirement for own funds and Eligible Liabilities (MREL)
1. Introduction
2. Methodology
3. Timeline

PART 4 – Balance Sheet and Profit and Loss Optimization

1. Basel 3 Game
2. Key lessons drawn

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PART 2 – FINANCIAL INSTRUMENTS VALUATION

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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
1 From IAS 39 to IFRS 9 – Key business and financial implications

i IAS 39

ii IFRS 9

2 Fair value credit and funding charges

i General introduction

ii CVA, DVA, FVA, MVA

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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
General introduction
The global financial crisis saw a structural shift in the operation of the global banking sector. Two changes are important in
understanding the changes in fair value measurement and pricing of derivatives through various valuation adjustments.
• During the financial crisis, concerns about bank creditworthiness led to an almost complete meltdown of the interbank
funding market. Consequently, interbank lending rates have been more volatile and traded at increased spreads compared
to zero risk rates. This has reflected a correction in the market view of a bank’s credit risk. As derivative desks have
traditionally relied upon cheap, unsecured borrowing to fund their operations, this change has increased funding costs for
banks trading derivatives.

Post Global Financial Crisis, there is a greater divergence between benchmark rates that were
traditionally regarded as ‘risk free’ (e.g. EURIBOR) and the Overnight Index Swap (OIS) rate, where
the OIS rate is now seen as a better proxy for the ‘risk free’ rate.

Banks’ funding costs over and above EURIBOR have increased post Global Financial Crisis as the
market repriced bank credit risk and liquidity premia charged in markets. As from 2013, credit
spreads above EURIBOR have decreased gradually. End 2018 credit spreads started to rise again in
anticipation to the ECB’s exit of the QE stimulus program. Further, concerns on global growth, free
trade & political uncertainties (Brexit, EU elections, Italy, …) are expected to drive volatility in the 5
coming months.
 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
General introduction
• The second significant change has been the introduction of new regulation to ensure that banks are adequately capitalised.
These have also targeted derivative transactions, and have had such an impact that trading desks have needed to
incorporate these changes in pricing. New regulation will require all financial sector derivatives, including those that are not
cleared through central clearing houses, to be collateralized. The cost of this collateralization has to be taken into account
when pricing a derivative.

As a result of the above macro changes, and the introduction of IFRS 13 Fair Value Measurement, we have seen the
introduction of various derivative valuation adjustments, essentially to reflect the additional ‘costs’ in holding a stock of
formerly differently priced derivative contracts in today’s world. From an accounting perspective, this is similar to an
inventory costing model, where additional costs are being factored into unit pricing and, for existing ‘stock’, valuation.

The following additional adjustments can be identified:

Adjustment Description Applicable to

CVA: Credit Value Adjustment Cost of counterparty credit risk on derivative Uncollateralised derivatives and
exposure (market implied value of this credit collateralised derivatives
risk)

DVA: Debit Value Adjustment Benefit a bank derives in the event of its own Uncollateralised derivatives and
default (flipside of CVA) collateralised derivatives

FVA: Funding Value Adjustment Cost of funding a collateralised derivative to Uncollateralised derivatives
hedge an uncollateralised derivative

MVA: Margin Value Adjustment Cost of posting ‘initial margin’ (collateral to Derivatives that are cleared through
post at CCP) against any derivative position CCP (at this stage)

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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
1 From IAS 39 to IFRS 9 – Key business and financial implications

i IAS 39 and hedge accounting

ii IFRS 9

2 Fair value credit and funding charges

i General introduction

ii CVA, DVA, FVA, MVA

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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
CVA: Credit Value Adjustment
We look at a very basic example to illustrate Credit Value Adjustment (CVA), Debit Value Adjustment (DVA) and Funding Value
Adjustment (FVA).
• Suppose a client wants to hedge its interest rate risk, and concludes a payer swap (uncollateralised) with a bank (receiver
swap for the bank). That same bank hedges its position in the financial market by concluding a payer swap (collateralised).
The interest cash flows cancel each other out.

Fix Fix
Client Bank Fin. Market
Float Float
Suppose interest rates drop
• The receiver swap (of the bank) will have a positive mark-to-market (MtM): the bank receives the same fixed rate, but pays
a lower floating rate. The payer swap has a negative MtM: the bank pays the same fixed rate, but receives a lower floating
rate.
MtM MtM

collateral received by bank collateral posted by bank

• Suppose the client defaults. The bank may not receive the positive MtM on its receiver swap in full (the bank hasn’t
received any collateral from the client), leading to a loss. This potential loss can be reflected in the accounts by decreasing
the mark-to-market of the derivative with a Credit Value Adjustment. This CVA is today’s best estimate (from a risk-
neutral point of view) of the potential loss incurred on derivative transactions due to the default of the counterparty.
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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
DVA: Debit Value Adjustment

Fix Fix
Client Bank Fin. Market
Float Float

• Suppose interest rates rise. The receiver swap (of the bank) will have a negative mark-to-market (MtM): the bank receives
the same fixed rate, but pays a higher floating rate. The payer swap has a positive MtM: the bank pays the same fixed rate,
but receives a higher floating rate.

MtM MtM

collateral posted by bank collateral received by bank

• Suppose the bank defaults. The bank may not pay the negative MtM on its receiver swap in full (the bank hasn’t posted any
collateral), leading to a loss for the client and a gain for the bank. This gain can be reflected by increasing the fair value of
the derivative with a Debit Value Adjustment. DVA is the price component of the bank’s own credit risk that banks are also
required to reflect in the price of uncollateralised derivative transactions. It is today’s best estimate (from a risk-neutral
point of view) of the potential gain incurred on derivative transactions due to the entity’s own default.

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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
FVA: Funding Value Adjustment
• Let’s look at the payer swap that the bank concluded in the financial market. This swap has a negative MtM because of the
lower interest rates. Since it is a collateralised swap, the bank has to post collateral to its counterparty. Credit risk is not
present. Therefore CVA and DVA on this swap are not required (except small CVA on settlement risk). However, another
issue arises.

Fix Fix
Client Bank Fin. Market
Float Float

MtM MtM

collateral received by bank collateral posted by bank

• Since the MtM of the payer swap is negative, the bank must post collateral. However, it does not receive any collateral on
its receiver swap. This implies that the bank will have to borrow additional funds in order to be able to post collateral.
These funds will be borrowed at the bank’s unsecured funding cost. The collateral posted will earn an interest rate specified
by the Credit Support Annex (legal document which regulates collateral for derivative transactions), which will typically be
the relevant (zero risk) OIS rate such as Fed funds or Eonia. The asymmetric nature of this cost of collateral adds additional
costs to transacting the swap, which is expressed by FVA (Funding Value Adjustment). The size of this cost relates to the
difference between the bank’s unsecured borrowing rate and the CSA rate, and will be incorporated in the price of the
uncollateralised swap.
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 PART 2 – FINANCIAL INSTRUMENTS VALUATION
2. Fair value credit and funding charges
FVA: Funding Value Adjustment
• Transactions secured with collateral are valued using a discount factor based on the Credit Support Annex (CSA) (in general
overnight indexed swap rates such as Eonia). Transactions not secured with collateral are valued using a discount curve
based on the bank’s unsecured funding cost (in general BOR + funding spread).

collateral
Bank Fin. Market Bank’s funding cost
CSA rate
(e.g. Eonia)
Bank’s
funding funding cost
CSA Rate (e.g. Eonia)

Bank B

Margin Value Adjustment (MVA)

• We explained that the exchange of collateral is required when the MtM of a derivative varies. This amount of collateral is
called Variation Margin (VM). Since the recent financial crisis, more new trades are obliged to be cleared through Central
Counterparty Clearing Houses (CCP). This implies that it is also required to post collateral up front to be allowed to enter
into a derivative contract with this CCP. This amount of collateral is called the Initial Margin (IM). This margin is required to
cover potential losses of the banks when they have to rehedge an exposure because of the default of the derivative-
counterparty. The higher the potential credit risk of the CCP, the higher the initial margin. Like FVA represents the funding
cost of Variation Margin during the lifetime of a derivative, Margin Value Adjustment (MVA) represents the funding cost of
the Initial Margin during the lifetime of a derivative.

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 PART 2 – 2 KEY IFRS TOPICS
2. Fair value credit and funding charges
Collateralized deals (law of one price)
Closing remarks : “Breaking the law of one price ?”

The markets (and especially Exchange markets) are based on the law of one price. The idea has always been
that between banks, the risk of default and the difference in credit risk and funding costs is so low that it
shouldn’t be priced in when evaluating derivatives. Under this assumption, the price of a derivative does
not depend on the parties buying/selling the derivative but solely on the market risks of the derivative
itself.

The XVA (CVA, DVA and FVA) broke the law of one price. Today, the price a bank is willing to pay for a
derivative depends on its opponents’ credit worthiness, the bank’s own credit worthiness and its funding
costs. These all have a material impact, even on an at the money swap (since the EPE and ENE of an ATM
swap are different from zero).

This is one of the reasons why all interbank deals are collateralized. For a collateralized deal, the party for
which the deal has negative value, will post this value already in cash to the counterparty. In return the
counterparty pays the overnight rate (EONIA for euro) to the posting party. When the party defaults, the
counterparty is allowed to take this cash as compensation. When the collateralization is continuously and
perfect, this completely eliminates CVA and DVA.

This also eliminates the funding problem. Since the collateral posted is equal to the cash amount in the
Black and Scholes reasoning, the discount used for a collateralized deal has to be the same as the interest
rate paid on the posted cash => EONIA. This means that all banks, by arbitrage argument, will discount
collateralized deals at the same rate.

Collateral => No CVA, no DVA, same FVA => return of the law of one price ?
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 PART 2 – 2 KEY IFRS TOPICS
2. Fair value credit and funding charges
Collateralized deals (imperfect world)
Posting frequency, Threshold, Minimum transfer amount, cure period

The previous slide assumed a perfect continuous collateral. In reality several imperfections mean that we
are not perfectly hedged against counterparty default

• Posting frequency: Collateral is not posted continuously but on a regular frequency. In between
banks this is almost always daily. This means that we are not covered against inter-daily market
movement.
• Threshold: Often a threshold will be negotiated. As long as the value of the entire portfolio is
below this threshold, neither party will post collateral.
• Minimum transfer amount: Even when above the threshold, sometimes it is agreed between
parties that no collateral is exchanged as long as the difference between the value of the
derivative and the current collateral is below a minimum transfer amount.
• Cure period: By far the biggest impact comes from the cure period. While the counterparty is in
default, it is allowed a cure period. This means that the defaulting party no longer needs to post
collateral but the bank can not yet take the collateral nor break up the deal with the defaulting
counterparty. This period is generally accepted to be around 10 business days. If during these 10
days the value of the derivative goes up, the collateral will not be enough to cover the derivative.

All these factors together add up. This means that even when collateral is posted, the CVA and DVA is not
entirely eliminated. In fact, a good estimate is that about 10% of the CVA and DVA remain even when a deal
is collateralized.

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PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND
ELIGIBLE LIABILITIES (MREL)

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PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
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Methodology
Introduction

Timeline
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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
1. Introduction
The origin of TLAC and MREL
Due to size, complexity, and interconnectedness banks could not undergo regular insolvency proceedings within the financial
crisis. Governmental bailouts were required, because the consequences of massive bank failures were deemed unforeseeable.
Concepts and legal frameworks on resolving institutions were not yet in place. The Core objective of the regulatory initiatives
in this regard was to ensure that bank resolutions in the future would become feasible and realistic, without requiring the
government and finally the taxpayer to cover losses, regardless of the size of an institution.

On a global level, the Financial Stability Board (FSB) took a leading role. In 2014, the ‘Principles on Loss-Absorbing and
Recapitalisation Capacity of G-SIBs in Resolution’ (TLAC), introduced the concept of an additional liability requirement for the
largest institutions on a worldwide level. These TLAC propositions are being adapted to the EU by means of the current CRR II
consultation. The key element of the concept is the so called “bail-in” tool, that aims at requiring institutions’ creditors to
participate in the institution’s losses and thus at banning the danger of another public “bail-out”.

In Europe, the Banking Recovery and Resolution Directive (BRRD) forms the legal basis for banking resolution proceedings,
bringing along an entirely new regulatory set-up. Within the Eurozone, this is complemented by the Single Resolution
Mechanism (SRM), that installs the Single Resolution Board (SRB) as the competent resolution authority for significant
institutions, comparable to the role of the ECB as the competent supervisory authority. While the ECB and the national
competent authorities are responsible for the “going-concern” supervision, the SRB and the national resolution authorities
focus on the task of crisis prevention and management.

The BRRD introduced an approach that is similar to TLAC, but can be applied to basically all institutions in the European
Union, not only to systemically important ones: Minimum requirement for own funds and eligible liabilities (MREL). In
contrast to TLAC, MREL will be set individually for each bank. Nevertheless, both approaches, TLAC and MREL focus on the
same key aspect: increasing the loss absorption capacity in the banking sector by means of a binding minimum ratio for loss
absorbing liabilities.

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
1. Introduction
Legal background of TLAC and MREL
In order to enable bail-in in an efficient manner, the existing regulatory ratios are complemented by new ones: TLAC and
MREL. While aiming at a gone-concern situation, they are still closely linked to the going-concern oriented Basel III/Basel IV
rules. The risk measurement for solvency purposes serves as the basis for the estimation of the MREL/TLAC needed.

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
1. Introduction
What is a bank resolution?
Resolution is the restructuring of a bank by a resolution authority through the use of resolution tools in order to safeguard
public interests, including the continuity of the bank’s critical functions, financial stability and minimal costs to taxpayers.

Banks provide vital services to citizens, businesses and the economy at large. In the past, because of the vital role played by
banks, and in the absence of effective resolution regimes, authorities have often had to put a taxpayers’ money to restore
trust and avoid a contagion effect of failing banks on the real economy.

In view of the critical intermediary role that banks play in our economies, financial difficulties in banks need to be resolved in
an orderly, quick and efficient manner, avoiding undue disruption to the bank’s activities and to the rest of the financial
system.

While for most banks this can be achieved through the normal insolvency proceedings applicable to any company in the
market, some banks are too systemically important and interconnected to allow for their liquidation through a normal
insolvency process.

Rather than relying on taxpayers to bail these banks out, a mechanism was needed to put an end to potential domino effects.
It should allow public authorities to distribute losses to banks’ shareholders and creditors – rather than on taxpayers.

Resolution occurs at the point where the authorities determine that a bank is failing or likely to fail, that there is no other
supervisory or private sector intervention that can restore the institution to viability (for example by applying measures set
out in a so-called recovery plan, which all banks are required to draft) within short timeframe and that normal insolvency
proceedings would cause financial instability while having an impact on the public interest.

If it is decided to resolve a bank facing serious difficulties, its resolution will be managed efficiently, with minimum costs to
taxpayers and the real economy. In extraordinary circumstances, the Single Resolution Fund (SRF), financed by the banking
sector itself, can be accessed. The SRF will be set up under the control of the SRB. The total target size of the Fund will equal
at least 1% of the covered deposits of all banks in Member States participating in the Banking Union.

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
1. Introduction
Role of Single Resolution Board
“The Single Resolution Board has been created to respond to the Euro area crisis and establishes one of the pillars of the
Banking Union. By avoiding bail-outs and worst-case scenarios, the SRB will put the banking sector on a sounder footing – only
then can we achieve economic growth and financial stability” – Elke König, Chair of the SRB

While BRRD establishes a completely new layer of banking regulation, the list of supervisory authorities is amended, as well.
As part of the national BRRD implementation, each EU member state has designated a national resolution authority.
Meanwhile on a Eurozone level, the Single Supervisory Mechanism (SSM) has been complemented by the Single Resolution
Mechanism (SRM), represented by the newly founded Single Resolution Board (SRB). It is directly responsible for the largest
and internationally active banks in the Eurozone. In order to deal with international banking groups (Eurozone/Non-Eurozone
as well as EU/third country), resolution colleges have been set up.

MREL-assessment process by resolution authority

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PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
20
Methodology
Introduction

Timeline
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2
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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL-targets at consolidated level: default calibration
• The MREL policy builds on the Delegated Regulation (DR) default formula, made up of two components:
• Default loss-absorbing amount (LAA), which reflects the losses that the bank will very likely incur in resolution
• Recapitalisation amount (RCA), which reflects the capital needed to meet ongoing prudential requirements after
resolution. The latter component is complemented by a market confidence charge (MCC), necessary to ensure
market confidence post-resolution.
• MREL targets are based on fully loaded risk weighted assets (RWA) and fully loaded capital requirements which are defined
in CRR/CRD.

CBR CBR
-125bp -125bp
P2R P2R

P1 P1

CBR CBR
P2R P2R

P1 P1

MREL
target
= LAA + RCA + MCC
Legend
P1 = Total Pillar 1 requirement, article 92 CRR
P2R = Total Pillar 2 requirement, article 104 CRD
CBR = Combined buffer requirement, article 128 CRD

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL-targets at consolidated level: default calibration
• Subordination is instrumental for making resolution strategies more credible and feasible. In order to improve resolvability
by addressing NCWO(*) risk and to support banks in effectively planning their funding needs, the SRB requires a minimum
level of subordinated instruments, depending on the size and systemic importance of banks. Subordination levels will be
set based on a combination of a general level, applicable buffer requirements and a metric, taking account of the bank-
specific nature of the assessment of NCWO risk in the senior liabilities layer. A floor of 16% RWA + CBR + NCWO add-on will
apply for G-SIIs, and of 14% RWA + CBR + NCWO add-on plus CBR for other resolution entities.

(*) According to the no creditor worse off (NCWO) principle no creditor or shareholder shall incur greater losses under resolution than they
would have incurred if the institution had been wound up under normal insolvency proceedings.

CBR
-125bp
P2R

P1
x% of RWA
CBR
with minimum proportion of subordinated debt
P2R - G-SIIs: 16% RWAs + CBR + NCWO add-on
- Other banks: 14% RWAs + CBR + NCWO add-on
P1

MREL
target
Legend
P1 = Total Pillar 1 requirement, article 92 CRR
P2R = Total Pillar 2 requirement, article 104 CRD
CBR = Combined buffer requirement, article 128 CRD

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL-targets at consolidated level: bank-specific adjustments
• Bank-specific adjustments are considered on the basis of the Delegated Regulation (DR). The DR enables resolution
authorities to make bank-specific adjustments to three components of the RCA, including the MCC. These adjustments
relate to the following (see also Figure):
• The RWA basis for the calculation of the RCA and MCC: while the DR makes it clear that the default amounts
should be the starting point, resolution authorities may use a different RWA basis from the reported RWA to
calculate the RCA and the MCC.
• The Pillar 2 own funds requirements used for the default RCA: these can be adjusted to tailor the amount required
to satisfy the applicable capital requirements to comply with the conditions for authorisation after the
implementation of the preferred resolution strategy.
• The level of the CBR used for the default MCC: this can be adjusted to tailor the amount required to maintain
sufficient market confidence after resolution.

Bank-specific adjustments under the DR for the RCA, including the MCC

CBR
RCA (including MCC) = RWAs x ( P1 + P2R +
– 125bp )
Adjustment of RWA basis Adjustment of Pillar 2 Adjustment of CBR
(Art. 2(3) DR) own funds requirement (Art. 2(7-8) DR)
(Art. 2(5) DR)

• The SRB may adjust the overall MREL target in light of a benchmark, a floor: it is stated that MREL ≥ of 8% of a bank’s total
liabilities and own funds (TLOF).

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL Eligibility criteria
Scope of MREL computations:
• MREL target based on resolution group’s RWAs
• MREL-eligible instruments, including own funds are based on consolidated (resolution group) level.

Eligible liabilities shall be included in the amount of MREL only if they satisfy the following conditions:
• Instrument is issued and fully paid up
• The liability is not owed to, secured by or guaranteed by the institution itself. As a consequence, intragroup liabilities of the
resolution entity subscribed by entities within the same resolution group and its liabilities secured or guaranteed by
another entity are not eligible to MREL.
• The purchase of the instrument was not funded directly or indirectly by the institution
• The liability has a remaining maturity of at least 1 year
• The liability does not arise from a derivative
• The liability does not arise from a deposit under DGS

Specific cases:
• Liabilities issued by non-EU entities
• Mostly excluded, except for minority interests in subsidiaries if recognised in the own funds of the EU parent, and if
the foreign subsidiary is part of the resolution group of the EU parent.
• Structured notes
• SRB excludes structured notes by default from MREL-eligible instruments.
• Liabilities issued to SPVs:
• Not MREL-eligible, except where the bank demonstrates that the funding does not impair the credibility and
feasibility of the operationalisation of the resolution strategy.
• Retail bondholders
• SRB does not see any legal basis to exclude these liabilities as long as they satisfy the the above described eligibility
conditions.

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL Eligibility criteria: Liability cascade in bail-in event

Common Equity Tier 1

(CET1)

If insufficient

Own Funds Additional Tier 1 MREL-eligible: MREL-eligible

subordinated debt x% of RWA
If insufficient - G-SIIs: 16% RWAs + CBR
+ NCWO add-on
Tier 2 - Other banks: 14% RWAs
+ CBR + NCWO add-on
If insufficient

Non-preferred senior
funding

If insufficient
Preferred senior &
retail non-structured
funding
Other Liabilities If insufficient

Deposits
non-covered by DGS
Non-MREL-
If insufficient
eligible
Depositis covered
by DGS

(*) Includes all categories of the class “non-subordinated liabilities” 25

 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
2. Methodology
MREL Eligibility criteria: Balance Sheet view of bail-inable instruments & impact on loan
pricing

Shareholders’ capital expecting Min RoE

1. Banks’ wholesale debts (Bonds)

issued on the primary debt markets.
2. Instruments are more costly than
commercial funding
3. Pricing of banks’ loans must take
these additional costs into account!

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PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
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Methodology
Introduction

Timeline
3
2
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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
3. Timeline
MREL timeline 2017-2019
The SRB follows a roadmap for MREL with a multi-year approach to ensure smooth progress.
• In 2017 cycle, for the first time, binding MREL targets at consolidated level were set for the majority of the largest banking
groups within the SRB’s remit, while informative targets were communicated to most of the other banking groups (80
binding and informative targets at consolidated level set in total).
• In 2018 cycle, the SRB is moving forward with binding MREL targets set at consolidated level for most of the banking
groups under SRB remit (93 decisions), and the introduction of MREL targets at individual level (249 decisions).
• The SRB set binding targets for all banking groups within the SRB’s remit by the end of 2019.

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 PART 3 – MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL)
3. Timeline
MREL 2021-2024

• The deadline for MREL compliance is January 2024.

• Moreover, the SRB has determined intermediate MREL target levels that Belfius should respect from
January 2022. The intermediate target levels, as a rule, ensure a linear build-up of own funds and eligible
liabilities towards the final target.
• The deadline for MREL subordination compliance is January 2022.
• Example for Belfius: (very similar for other banks)

01/20 01/21 01/22 01/24

intermediate targets final targets

MREL subordinatIion target in 17,5% 19,25% 19,25% 17,5% 17,5%

TREA/RWA% *
MREL target in TREA/RWA% * 26,37% 26,37% 26,62% 26,87%

MREL target in TLOF% 10,56%

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References

• Thimann, C (2014), “How Insurers Differ from Banks: A Primer in Systemic Regulation”, LSE Systemic Risk
Centre Special Paper 3, July.
• Insurance Europe (2014), “Why Insurers Differ from Banks”, October.
• Insurance Europe, Oliver Wyman (2013), “Funding the Future: Insurers’ role as institutional investors”,
June.
• Bohn, Elkenbracht-Huizing (2014), “The handbook of ALM in Banking: interest Rates, Liquidity and the
Balance Sheet.”
• Basel Committee on Banking Supervision (2013), “Basel III: The Liquidity Coverage Ratio and liquidity
risk monitoring tools”, January.
• Basel Committee on Banking Supervision (2014), “Basel III: The Net Stable Funding Ratio”, October.
• PWC (2005), “International Financial Reporting Standards: IAS 39 – Achieving hedge accounting in
practice”, December.
• PWC (2013), ”Practical guide: General hedge accounting”, December.
• EBA (2015), “Final Report: Guidelines on the management of interest rate risk arising from non-trading
activities”, May.
• EBA (2015), “EBA Report on Credit Valuation Adjustment (CVA) under Article 456(2) of Regulation ‘EU)
No 575/2013 (Capital Requirements Regulation – CRR)”, February.
• Bohn, A., Elkenbracht-Huizing , M. (2014), “The Handbook Of ALM In Banking: Interest Rates, Liquidity
And The. Balance Sheet”
• PWC (2017), “MREL, TLAC and Banking Resolution”, December.
• EIOPA (2018), “Financial Stability Report”, December.
• SRB (2019), “MREL – 2018 SRB Policy for the second wave of resolution plans”, January.
• SRB (2018), “7th SRB – Banking Industry Dialogue Meeting, SRB MREL Policy”, December.

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