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Banking 19 Nov 2019

Keys to understanding the new anti-crisis buffer for European banks

In recent months, the term MREL (which stands for Minimum Required Eligible Liabilities) has been appearing more and more frequently in business and economic news outlets. We see it being used repeatedly in bank-related reports, but what is behind this acronym?

The MREL: What is it?

The MREL is a new regulatory requirement that European banks are required to meet, intended to build a solvency buffer capable of absorbing the losses of a financial institution in case it enters resolution.

Each banking group’s buffer level is determined on a case-by-case basis, based on their risk level and other particular characteristics. The purpose is to guarantee that each bank allocates the appropriate volume of own funds and eligible liabilities to, in first place, absorb any eventual losses, and, in second, ensure it can recapitalize without recourse to public funds.

What’s the purpose of the MREL?

The MREL was introduced as part of the new batch of EU-wide regulations passed since the banking union came into effect on November 2014. The body that determines this buffer is the Single Resolution Mechanism (SRM).

In fact, despite the fact that the MREL became effective on January 2016, a long phase-in period has also been determined on a case-by-case basis.

The MREL is therefore part of the European authority’s plan to ensure that banks have enough liabilities to prevent taxpayers from bearing the burdens of any eventual bank bailouts. This is the so-called bail-in.

The MREL is, so to speak, the European version of the TLAC, anti-crisis buffer designed for Global Systemically Important Banks (or G-SIBs). However, and although they serve the same purpose, there are several differences that set them apart. One of the most significant ones is that the MREL applies to all EU banks regardless their systemic footprint, while the TLAC will be exclusively applied to the institutions included in the aforementioned list.

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