MREL. A key tool to preserve financial stability and longrun competitiveness - SRB Chair Dominique Laboureix for Eurofi magazine

The minimum requirements for own funds and eligible liabilities, or MREL, is a critical tool for ensuring resolvability at bank level and financial stability at global level, and is intimately linked to the ins-and-outs of the EU resolution framework. 

In the wake of the Great Financial Crisis, global policymakers at the Financial Stability Board (FSB) worked to solve a twofold problem – ensuring the end of expensive banks’ bailouts while putting in place industry safety nets in preparation of the next inevitable crisis. To this end, the FSB developed the Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs). The TLAC requirement protects taxpayers by ensuring that bank shareholders and certain creditors are first in line to absorb losses. Then, the FSB members implemented these standards at home. 

MREL is the European Union’s implementation of the TLAC standard. Naturally, MREL is tailored to the specificities of the European framework. MREL differs from TLAC in two ways. First, MREL requirements extend to all banks earmarked for resolution and not only the G-SIBs. Second, MREL is much more tailored to the specific resolution strategies and characteristics of each bank. In practice, this approach means that requirements for G-SIBs in the EU look on average higher when comparing to their US peers. Crucially, EU banks can cover a large part of MREL, unlike TLAC, with cheaper non-subordinated liabilities. Nevertheless, some European banks have been complaining about international level playing field. We need to be cautious here. Comparing only the percentage requirements in different jurisdictions is not enough. The wider picture matters. In fact, the prudential metrics that underpin MREL and TLAC – risk-weighted assets (RWAs) and leverage – are computed differently in the Banking Union and the US. With these factors at play, also coming from the macro-prudential framework – plus the key differences between MREL and TLAC – comparing between countries is anything but straightforward. 

Also, MREL in Europe needs to cater for the rigidities of our framework. In the EU, in fact, shareholders and creditors must absorb losses for the equivalent of 8% of total liabilities and own funds (TLOF) before an institution can receive solvency support from the Single Resolution Fund. In contrast, other jurisdictions, such as the US, have the flexibility to invoke a systemic risk exception in certain situations – allowing them to bypass such burdensharing requirements, as seen during the recent US regional banking turmoil. This is why, in Europe, a right amount of MREL is critical to underpin the credibility of a resolution decision without fostering moral hazard. 

The situation should evolve further with the implementation of the Basel III regime. Basel III introduces stricter RWAs thus increasing capital requirements. MREL will mechanically go in the same direction. Though the interplay with other already existing requirements, such as the leverage requirement and the link to 8% TLOF, implies that MREL should increase less than proportionally with respect to capital. Regardless of the possible changes in the prudential framework, we should remember that one of the key lessons from the 2023 crisis is that when resources like MREL are absent, or not sufficient, the cost of intervention can be steep. 

Recognising this, the FDIC last year moved to expand TLAC-like requirements to more banks through its long-term debt proposal. The new US administration has not yet announced its plans for this reform. Meanwhile, European banks are at this point MREL compliant—putting us a few years ahead of the curve. Reaching full MREL compliance in the Banking Union, in fact, took a whole decade. MREL buildup was one of the key items of a broader risk reduction agenda, devised and monitored by the Eurogroup, with the ultimate aim of breaking the risk of taxpayer funded bail-outs. Now that the MREL targets are met, it is not the time to backtrack. MREL targets serve us well. MREL, and the broader resolution framework, acts as an insurance policy for future growth, ensuring financial crises don’t derail progress. This hard-earned gain deserves recognition, but the focus must now shift to banks’ ability to deploy these resources in a crisis—a central theme of the SRB’s strategy.

 In conclusion, the credibility of our system hinges on banks having enough loss-absorption capacity in all scenarios. A credible and well-equipped crisis management framework, in turn, is the foundation of a dynamic and resilient banking sector. A stable and predictable crisis management framework makes the banking sector more resilient, which, in turn, drives competitiveness in the long run.