Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.1:2.5.1 Calculation of MREL

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.1

2.5.1 Calculation of MREL

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The MREL is set at the amount necessary to (i) absorb losses and (ii) recapitalise the bank, so that following resolution, it complies with the continuing authorisation requirements in accordance with CRD IV.1 If the resolution strategy for a certain bank is liquidation instead of resolution, the recapitalisation amount may be zero.2

The minimum MREL ratio is not defined in the BRRD and the SRMR, but has to be determined by the resolution authorities for each bank (group) separately. In determining the MREL level, the resolution authorities have to take into account the amount of liabilities that are excluded from bail-in on the basis of Article 44(2) BRRD (Article 27(3) SRMR) or reasonably likely to be fully or partially excluded on the basis of Article 44(3) BRRD (Article 27(4) SRMR).3 Other factors that have to be taken into account are the business model, funding model and risk profile of the bank, the size of the bank and the likeliness that the bank poses a systemic risk in case of failure and the contributions that will be paid by deposit guarantee schemes to the financing of resolution.4

It can be derived from a report from EBA dated 14 December 2016 that the average MREL ratio of a sample of 133 EU banks as of end December 2015 stood at approximately 15% of total liabilities and own funds or 37% of TREA.5 The SRB considers that an MREL level of at least 8% of total liabilities and own funds would generally be required for all major banking groups within the European Banking Union.6 The MREL approach of the SRB is further discussed in section 2.5.1.1.

The MREL should be included in the resolution plan of a bank, including a deadline to reach the required level set by the resolution authority, where applicable.7 If it follows from the resolvability assessment of a bank8 that there are substantive impediments to the resolvability of a bank, resolution authorities may require a bank to take other steps to meet the MREL, including in particular to attempt to renegotiate any eligible liability, additional Tier 1 instrument or Tier 2 instrument it has issued.9

2.5.1.1 MREL approach of the SRB

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