Minimum requirement for own funds and eligible liabilities (MREL)
Since the failure of banks, triggered by the financial crisis 2007, had a high impact on the whole economy, the Banking Union and their authorities were founded, and new regulation was implemented to prevent bail-out of banks. As a result, taxpayers’ money shall be safe as banks are required to prepare a plan in such a way that at least the critical functions of a bank can continue.
Therefore, it is required for credit institutions to maintain
a minimum amount of own funds and eligible liabilities, which is called MREL. It is a legal requirement stemming from the Bank Recovery Resolution Directive (BRRD) in connection with the Capital Requirements Regulation (CRR).
Aim of this requirement is to ensure an effective implementation of the bail-in tool, as one resolution tool, in case of failure of a bank. Not only the own funds of a bank serve to absorb any losses, but also eligible liabilities are able to be converted into equity and therefore can be used for loss absorption. It follows that equity investors as well as subordinated and senior creditors of the bank must step in in the event of failure of the bank, and no longer the public sector as it was the case in the financial crisis.
Generally, MREL can be divided into internal and external MREL:
- Internal MREL: means that, in some cases, the loss of a subsidiary must be taken over from the parent company.
- External MREL: according to the order of their priority, some liabilities can be converted into equity and used for loss absorption.
Important to mention in the context with MREL is also the so-called ‘No Creditor-Worse-Off’ principle (NCWO). It implies that no creditor may be worse off in resolution than it would be in regular insolvency proceedings.
This principle can lead to a situation where it requires additional loss absorbing capacity i.e., increasing the MREL to be issued by banks. So, banks need to efficiently manage their liability side to keep the requirements and connected issuance cost on lowest possible level.
Published on 20.07.2022
For inquiries please contact:
RBI Regulatory Advisory
Raiffeisen Bank International AG | Member of RBI Group | Am Stadtpark 9, 1030 Vienna, Austria | Tel: +43 1 71707 - 5923