What are Minimum Requirement for own funds and Eligible Liabilities (MREL)?
The Bank Recovery and Resolution Directive (BRRD) provides that institutions established in the European Union (EU) should meet a minimum requirement for own funds and eligible liabilities (‘MREL’) to ensure an effective and credible application of the bail-in tool. Failure to meet MREL may negatively impact institutions' loss absorption and recapitalisation capacity and, ultimately, the overall effectiveness of resolution. This requirement is part of the necessary steps needed to make institutions resolvable. The BRRD requires that MREL is tailored to bank-specific features, including its size, business model, funding model and risk profile and the needs identified to implement the resolution strategy. MREL targets are set by EU resolution authorities, after consultation with prudential supervisors, and should be complied with by banks at the end of the transitional period, if any. MREL pursues the same regulatory aim of ensuring sufficient loss absorbing and recapitalization capacity in resolution as the TLAC standard developed by the Financial Stability Board (FSB). TLAC was designed for global systemically important banks (G-SIBs) at the international level, and has been formulated differently in some aspects. The European Commission has published legislative proposals in November 2016 to implement the TLAC standard into EU law; the respective legislative process is ongoing.
Who sets MREL?
The minimum requirement for own funds and eligible liabilities (MREL) is set by resolution authorities to ensure that a bank maintains at all times sufficient eligible instruments to facilitate the implementation of the preferred resolution strategy.
Purpose of MREL
MREL serves to prevent a bank’s resolution from depending on the provision of public financial support, and so helps to ensure that shareholders and creditors contribute to loss absorption and recapitalisation.
MREL is a separate minimum requirement set by resolution authorities that applies to an institution alongside its prudential minimum capital requirements. The calibration of MREL is, however, linked to prudential requirements as some of its components refer to capital requirements (Pillar I, Pillar II, prudential buffer requirements), and capital instruments held by the banks to comply with their prudential requirements are also eligible as MREL.
What is meant by ‘MREL shortfall’?
A bank faces an MREL shortfall when it does not hold sufficient own funds and eligible liabilities to meet its MREL target determined by the resolution authority. A MREL shortfall does not necessarily imply that the bank has a capital shortfall nor that it will be considered as failing or likely to fail. Well-capitalised banks meeting their prudential requirements may be required by resolution authorities, among other actions, to hold an additional amount of MREL liabilities (in the form of own funds or eligible liabilities) in order to ensure that the implementation of the resolution strategy is credible and feasible. 2 In the context of MREL Decisions of the SRB, and according to the resolution framework, banks which do not immediately meet their MREL target have been granted a specific transitional period to comply with the requirement, allowing banks to, as an example, issue additional eligible instruments and thereby improve their resolvability.
Which banks are subject to a binding MREL target?
The SRB adopted a gradual approach to setting MREL over a multi-year timeframe. The SRB decided in 2016 to set non-binding, informative MREL targets only. Binding Decisions on MREL at consolidated level have been taken during the 2017 resolution planning cycle for the majority of the largest and most complex banks in the Banking Union (BU), including all global systemically important institutions (G-SIIs), and banks with resolution colleges under its remit. Most other SRB banks remain subject to informative targets, not subject to a formal Decision, thus paving the way for future binding decisions by incentivising banks to progress towards improved resolvability and eventually comply with increasing requirements.