MREL requirement
A key element in ensuring resolution without the use of state funds is that institutions hold sufficient eligible liabilities (MREL). MREL funds are owned by creditors and, according to the creditor hierarchy, these creditors are generally the first to bear losses if the institution lacks sufficient capital. For this reason, the Danish Financial Supervisory Authority (DFSA) sets an individual MREL-requirement for each institution or group. The MREL-requirement aims to ensure that there are sufficient liabilities to absorb losses in a resolution situation and to recapitalise the institution.
The MREL-requirement is determined based on two approaches: either the institution's total risk exposure (risk-weighted exposures) or its total exposure measure (leverage ratio). The larger of the two becomes the applicable MREL-requirement. MREL-requirements for the respective Danish O-SII institutions are typically updated annually and will be publicly disclosed by the institutions starting in 2025.
Mortgage institutions are exempt from MREL-requirements but must instead comply with a debt buffer requirement under section 268 of the Danish Financial Business Act (FIL).
The current regime for resolution planning and handling of distressed credit institutions and mortgage credit institutions was introduced with Directive 2014/59/EU of May 15, 2014, establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD). The BRRD was subsequently updated with BRRD2, which was implemented in Danish legislation effective from December 28, 2020. On April 18, 2023, the European Commission proposed BRRD3 as part of the CMDI package.
Link: Commission proposes reform of bank crisis management
Audit statement regarding resolution preparedness
It is crucial that companies can provide up-to-date financial information for the crisis management that will be handled by the Financial Supervisory Authority (DFSA) and Financial Stability Company (FSC) if a company becomes distressed or is expected to become distressed. It is also crucial that companies have implemented procedures and systems that support the effective execution of a resolution. Therefore, rules on this matter are established in Section 245 a of the Financial Business Act, Section 182 of the Act on Securities Firms and Investment Services and Activities, as well as in Executive Order No. 2018 of October 26, 2021, on Resolution Planning and Resolution Preparedness.
A company's external or internal auditor must annually review the company's arrangement and implementation of procedures and systems to comply with the requirements of Sections 4-12 in the Executive Order on Resolution Planning and Resolution Preparedness. The external auditor must issue a statement regarding the review performed, which must be issued according to the standards of the DFSA. The standards for the relevant types of companies can be found below.
The signed statement can be submitted to the DFSA via email at: resolution@ftnet.dk