MDA Mechanism – The most relevant policy decision to be taken by the SSM

MDA Mechanism

How the MDA will be calculated is under current SSM consideration and a decision is imminent.

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According to CRD IV (Capital Requirements Directive IV), Member States shall require institutions to meet the combined capital buffer requirement (consisting of the capital conservation buffer, countercyclical buffer and systemic buffer). Failure to do so means the bank must calculate the Maximum Distributable Amount (MDA). The MDA is a factor (depending on how close the bank is to meeting the buffer) multiplied by distributable profit and restricts the banks dividend decision.

The issue is whether for the purposes of the MDA exercise, the capital buffer sits on top of Pillar 1 requirements or Pillar 1 and 2 requirements combined? There appears to be different interpretations by various National Competent Authorities.

The European Systemic Risk Board (ESRB) anticipated the problem in its response to the call for advice by the European Commission on macro-prudential rules in the CRD/CRR in April 2014. 

This advice was consequence of the different interpretations across Supervisory Authorities in Europe about when the MDA Mechanism must be considered and how to calculate it if it is required. This divergences could result in, among other things, that the dividend restrictions for an institution would be different depending on where it is located within the Euro area.  

More concretely, the Article 141 CRD IV sets out that the MDA must be calculated based on the CET1 capital required  under Article 92(1)(c) CRR i.e. Pillar 1 capital requirement. In other words, CET1 capital that is maintained to meet Pillar 2 requirements (Article 104 CRD) is not considered for the MDA calculations. However, ECB SREP letters set a minimum capital requirement consisting of Pillar 1 and 2 requirements. Which is the correct CET1 capital required for calculating MDA? KPMG member firms have observed different supervisory approaches for this question. In some cases, only Pillar I is considered, in others cases Pillar 1 and Pillar 2 requirements. For banks directly supervised by the ECB and for their stakeholders it will be essential to know what is the SSM position on this crucial topic? We understand that this issue is under current SSM consideration and a decision is imminent. In our opinion, the sooner the better.

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