Recital 8

(8)To ensure that the deduction regime remains proportionate, intermediate entities should be able to choose the mix of instruments, consisting of own funds or eligible liabilities, with which they fund the acquisition of ownership of internal MREL eligible resources. That would allow intermediate entities to completely avoid any own funds-related deductions as long as they have issued sufficient eligible liabilities. The deductions should therefore first be applied to the eligible liabilities items of the intermediate entities. Where the intermediate entity is required to comply with internal MREL pursuant to Directive 2014/59/EU on an individual basis, the deductions should be applied to the eligible liabilities meeting the conditions of Article 45f(2) of that Directive. In case the amount to be deducted exceeds the amount of the eligible liabilities items of the intermediate entities, the remaining amount should be deducted from their Common Equity Tier 1, Additional Tier 1 and Tier 2 items, starting with Tier 2 items in accordance with Article 66, point (e), of Regulation (EU) No 575/2013. In such a case, it is necessary that the deductions corresponding to the remaining amount are also applied when calculating own funds for the purposes of the requirements laid down in Regulation (EU) No 575/2013 and Directive 2013/36/EU of the European Parliament and of the Council ¹¹ . Otherwise, the solvency ratios of intermediate entities that have issued own funds, rather than eligible liabilities, to fund the acquisition of ownership of internal MREL eligible resources may be overstated. Additionally, by keeping the treatment of holdings of internal MREL eligible resources aligned for prudential and resolution purposes, an undue increase in complexity is avoided, as institutions would be able to continue to calculate, report and disclose one set of total risk exposure amount and total exposure measure for prudential and resolution purposes. Article 49(2) of Regulation (EU) No 575/2013 should therefore be amended accordingly.