Similarly European resolution authorities setting MREL in the EU will need to consider how to go from MREL in current liability structures to an MREL that ultimately meets the BRRD objectives. The RTS allows transitional MREL to be set until 2020. Work needs to be done to clean up existing liability structures to make them consistent with requirements. This is firm level work which will be addressed as part of the resolution planning process. Let me give you some examples of what I have in mind. •  My first is structured notes. Some respondents to the FSB consultation suggested the blanket exclusion of structured notes from TLAC should be relaxed. We are reflecting on that. But the current situation is that in many cases structured notes have been issued to meet the needs of often quite small pockets of investors. The result is that some firms have many thousands or even tens of thousands of notes outstanding each with different structures and embedded derivatives. Trying to value all these instruments and bail them in would be a barrier to making resolution work. And as such will need to be addressed as part of the resolution planning process for a particular firm. •  My second example is non-equity capital instruments issued out of operating companies. As I described earlier, SPE strategies are built around putting only the top company in a group into resolution and avoiding legal risk and the potential dislocation of systemic functions by keeping operating subsidiaries outside resolution.
It is now clear that rating agencies’ models failed in the recent past as a result of wrongly basing their ratings on the correlations observed during good times. In my opinion, the recent methodological changes, imposing stricter rating caps (above the rating of the sovereign), in particular for EMU countries, amount to treating crisis times as structural changes making the new methodologies based again on extreme assumptions. Thus, the error is the same, this time in the opposite direction. Policy-makers timely acknowledged the fragilities in the design of the EMU, identifying the most crucial reforms needed. These will increase the robustness of the euro area economies against adverse shocks. Rating agencies do not fully recognize the ongoing process. Instead, they decide to change their procedures exactly at the moment in which the institutional framework of the EMU is responding to the very same conditions that motivated such move. In this regard, it is important to emphasize that EMU countries are about to be equipped with a banking union, which will contribute towards breaking the link between sovereigns and the banking/financial system. Further relevant institutional changes include the creation of the European stability mechanism, the Fiscal Compact, the new role of the ECB in eliminating runs on sovereign debt (through the Outright Monetary Transactions programme) and a comprehensive set of EU regulations aimed at avoiding fiscal and macroeconomic imbalances. Therefore, rating agencies are moving countercyclically with the EU institutional advances and risk becoming irrelevant.