Banks have until 2020 to build up capital buffers

The European Union’s 7,000 banks must by 2020 hold a new buffer of bonds that can be written down to avoid taxpayer bailouts in a crisis, the bloc’s banking watchdog said yesterday.

The European Banking Authority (EBA) published draft rules for consultation that detail the so-called minimum requirement for own funds and eligible liabilities (MREL) that all banks must have under a new EU law on handling bank collapses.

It would comprise the core capital buffers banks already hold, topped up with similar capital, retained earnings or bonds that can be written down.

New authorities being set up across the EU to deal with stricken lenders will determine by 2016 on a bank-by-bank basis how much MREL each lender must hold.

Banks would then have four years to comply.

The aim of the EBA’s consultation paper is to restrict how much latitude the authorities have in their MREL determinations so that the rule is applied consistently across the EU’s 28 countries.

The EBA also spelled out how the rules would dovetail with an initiative at the global level led by the Financial Stability Board (FSB), which has proposed a similar buffer, known as Total Loss Absorbing Capacity or TLAC.

“Built into the EU framework is a review by EBA in 2016 covering the alignment with the international framework,” Stefano Cappiello, EBA’s head of recovery and resolution unit, told Reuters.

“The European Commission, European Parliament and EU states could decide whether legislation is needed to put the TLAC figure into EU law,” Cappiello added.

The EU rules are also less detailed on what sort of bonds are eligible.

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