Close panel

Close panel

Close panel

Close panel

Banking 04 Apr 2016

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 will be 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 will be 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. Although the requirement will be established on an individual case basis, it is expected to be set at a minimum equivalent to 8% of the institution’s total liabilities.

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). 2016 – the year in which the Bank Recovery and Resolution Directive (BRRD) has come into force – is expected to be the year in which the final provisions of the MREL will be finalized.

In fact, despite the fact that the MREL became effective on January this year, the EBA proposed a long phase-in period – which will run through 2020 – to allow institutions to conform to the new regulation (48 months), although this will also be 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.

What we still do not know about it

There are many things we still do not know about the MREL buffer, such as its specific application calendar or its level for each institution. By year end, all these details should have been made public. Indeed, the Bank Recovery and Resolution Directive (BRRD) establishes that the European Banking Authority (EBA) should submit a report on October 2016 to the European Commission analyzing the consistency of the MREL with the Financial Stability Board’s (FSB) final TLAC ratio proposal, which was released on November 2015.

Based on this report, the European Commission will elaborate a legislative proposal before the end of the year, establishing, among other things, the harmonization framework for this new requirement in the different European countries, in order to ensure the MREL can be finally rolled out.

Other interesting stories