MREL (Minimum Requirement for Own Funds and Eligible Liabilities) is a regulatory requirement imposed on banks and financial institutions under the European Unions Bank Recovery and Resolution Directive (BRRD).
The main purpose of MREL is to ensure that banks have sufficient loss-absorbing capacity to support their critical functions and avoid taxpayer-funded bailouts in the event of financial distress.
To tailor MREL to each banks specific characteristics, such as size, business model, funding model, and risk profile, the BRRD stipulates that the EU resolution authorities, in consultation with prudential supervisors, set individual MREL targets. Banks are required to comply with these targets by the end of any applicable transitional period.
MREL shares the same regulatory objective as the Total Loss-Absorbing Capacity (TLAC) standard developed by the Financial Stability Board (FSB). While TLAC was designed for globally significant banks (G-SIBs) at the international level, it may differ from MREL in certain aspects. However, both standards aim to ensure that banks have sufficient loss-absorbing and recapitalization capacity in times of resolution.
The MREL ratio is calculated by dividing the banks MREL-eligible liabilities by its total liabilities. The MREL-eligible liabilities include instruments that meet the specified criteria and conditions set by regulatory authorities for loss absorption and recapitalization purposes during resolution.
The purpose of MREL is of utmost importance as it aims to prevent the
necessity need of public financial assistance during a banks resolution process, holding shareholders and creditors accountable for loss absorption and recapitalization.
This requirement stands apart from an institutions prudential minimum capital requirements and is determined separately by resolution authorities. However, MRELs calibration is closely linked to prudential requirements, as certain components of MREL correspond to capital requirements, including Pillar I, Pillar II, and prudential buffer requirements. Moreover, capital instruments used by banks to fulfill their prudential requirements are eligible for inclusion in MREL.
MREL plays a crucial role in ensuring the financial stability and resilience of various entities, including investment firms and globally systemically important banks. The resolution authority and the Single Resolution Board play a significant role in setting MREL targets. Building societies and parent companies are also subject to meet MREL obligations, which include eligible liabilities instruments and recapitalization components.
The European Parliament and the Council, per the Capital Requirements Regulation, have written and accounted for the new MREL requirements, providing sufficient resources for banks and firms to meet their MREL targets. Meeting MREL is crucial for banks and entities to demonstrate sufficient balance sheet strength and meet the total risk exposure amount. Moreover, the TLAC and subordination requirements are subject to provisions to ensure effective resolution tools and protect critical functions.
The UK and the European Banking Union are among the regions that have implemented the MREL regulations to ensure financial stability and resilience. Overall, MREL serves as a critical aspect of modern financial regulations, designed to enhance the stability and resolution capabilities of banks and financial institutions.
MREL is a regulatory requirement imposed on banks and financial institutions under the European Unions Bank Recovery and Resolution Directive (BRRD).
The specific authority responsible for setting MREL requirements can vary depending on the jurisdiction and the type of financial institution. In the European Union, the responsibility for setting MREL requirements lies with the relevant national resolution authorities (NRAs) or the Single Resolution Board (SRB) at the European level.
Each EU member state has its own NRA responsible for setting MREL requirements for banks and financial institutions operating within their jurisdiction. NRAs work closely with the European Central Bank (ECB) and the European Banking Authority (EBA) to ensure consistency across the EU.
The Single Resolution Board (SRB - is a central resolution authority responsible for banks under the Single Resolution Mechanism (SRM) in the Eurozone countries. The SRB is involved in the resolution planning and setting MREL for significant banking groups and cross-border banking institutions.
The MREL requirement operates independently alongside another regulation introduced in 2015 known as TLAC.
Due to the legal confusion surrounding the distinctions between TLAC and MREL, the European Commission proposed an amendment to the BRRD directive called BRRD 2 (EU Directive 2017/2399/EU). This amendment introduces a new class of unsecured bonds called Senior Non-Preferred Bonds for bank issuers. These bonds are intermediate between senior debts with higher priority and "junior" or subordinated debts. Essentially, the Senior Non-Preferred Bond acts as a safety buffer placed between the junior and senior liabilities issued by the bank. In case the conditions necessitate the initiation of the ordinary insolvency procedure, the Senior Non-Preferred Bond will be classified as both "more junior" than other unsecured senior loans and "more" senior than subordinated liabilities such as Tier 1 or Tier 2.
MREL and TLAC differ in the following aspects:
Issuers. MREL applies to EU banks, while TLAC applies only to G-SIIs (Global Systemically Important Institutions).
Effective date. MREL came into effect on 1 January 2016, whereas TLAC was effective from 1 January 2019.
The calculation basis. MREL considers all sources, whereas TLAC is based only on RWAs (Risk Weighted Assets).
Deductibility for calculating the capital requirement: MREL has no deductibility, whereas TLAC allows for the deduction of "TLAC-compliant" instruments already held in the issuing banks portfolio issued by other G-SIIs.
Capital requirement. MREL requires 100%, whereas TLAC requires 16% and 19% of RWAs from 2019 to 2022.
Subordination. Applying TLAC requires subordination, which is not mandatory for MREL, though it may be considered.
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