The MREL Framework Under the Banking Reform Package

The adoption of the “Banking Reform Package” (CRR2, CRD4, BRRD2, SRMR2) in 2019 led to material changes, among others, in the regulatory framework governing the Minimum Requirement for Own funds and Eligible Liabilities (MREL). The revised framework aimed at introducing the rules adopted by the Financial Stability Board (FSB) on the Total Loss-Absorbing Capacity (TLAC) to the Union law and addressing the deficiencies of the former framework. As regards the novelties brought in by the new framework, the most significant one pertains to the introduction of a minimum and fixed requirement (Pillar 1 MREL) for Global Systemically Important Banks (G-SIBs) and other large banks. At the same time, all banks are still subject to the bank-specific requirement (Pillar 2 MREL) for which no material amendment in the determination approach is introduced in the revised framework. In practice, the MREL target that banks must meet is the higher of the Pillar 1 MREL and the bank-specific Pillar 2 MREL. Other key elements of the revised framework are related to the obligation for banks to cover a significant part of the MREL with instruments subordinated to liabilities excluded (or likely to be excluded) from bail-in (subordination requirement), the introduction of the internal MREL for subsidiaries of resolution entities and the establishment of harmonized criteria for MREL-eligible liabilities. Furthermore, the revised rules clarify several aspects of the former framework, including the deadline for banks to meet the MREL, the redemption of MREL-eligible liabilities and the measures to address a breach of the MREL. The present paper analyses the aforementioned key elements of the revised MREL framework and assesses its conformity with the TLAC standard, as well as the implications that may arise as a result of its complexity and the discretions provided to resolution authorities. As regards the first point, the analysis indicates that the transposition of the TLAC rules into the Union law not only achieves the target of conformity, but also in some cases the MREL extends beyond the scope and the level required under the international standard. In relation to the nature of the requirement, the MREL framework is characterized by a significant degree of complexity and the discretionary powers assigned upon resolution authorities. Excluding the Pillar 1 MREL applicable to G-SIBs and “top-tier banks”, there is no other single MREL-related requirement that is clear about which banks it applies to and what the level thereof is. All other requirements are subject to decisions taken by resolution authorities, mostly based on unclear criteria. Hence, resolution authorities have extensive powers to decide on the scope of requirements (e.g. Pillar 1 MREL, Pillar 2 MREL, subordination requirement, internal MREL) and other critical aspects (e.g. transitional period for Pillar 2 MREL, redemption of MREL-eligible liabilities, measures to address a breach of the MREL). The discretionary character of the framework allows resolution authorities to translate the MREL rules into their policies in a different way resulting in a divergent application of the MREL across the EU. In addition, discretions foster ambiguity regarding the requirements that banks are obliged to meet, even if they are under the remit of the same resolution authority. As a result, these arrangements cause uncertainty to both banks and investors over the applicable requirements, the MREL needs and the resources required to meet those needs.