Too-big-to-fail banks in the European Union differ wildly in the amount of bail-in debt and equity they must hold to satisfy minimum requirements for eligible liabilities (MREL).

The mandated ratio of MREL to risk-weighted assets ranges between 20.7% and 32.8% across the 16 resolution groups that make up the 11 global systemically important banks in the EU. A resolution group is a point of entry through which an imploding bank would be recapitalised. Certain G-Sibs have more than one resolution group.

The weighted average MREL requirement for these entities is 26.5% of RWAs. The actual amount of MREL outstanding issued by these groups equates to 29.4%, well exceeding the minimum. But seven of the resolution groups reported MREL shortfalls of an aggregate €51.3 billion ($55.6 billion), equivalent to 3.4% of RWAs.

Each bank has its own phase-in period in which to build MREL to their required amounts. These range from January 1, 2020, to January 1, 2023.

What is it?

The Bank Recovery and Resolution Directive instituted MREL to make sure troubled banks could recapitalise without resort to public funds.  

The EU’s Systemic Risk Board, together with national resolution authorities, started assessing banks’ loss-absorbing capacities in 2016. The following year it started developing binding requirements for major banking groups and, in 2018, began setting specific targets.

The EBA analysed 222 resolution groups from 24 member states in its latest quantitative assessment, using data as of December 2018.

Why it matters

Most G-Sibs with MREL shortfalls should find it easier to make up their deficits than their smaller rivals, as they have large amounts of debt outstanding that are not bail-in eligible, but could be re-issued as such.

They should also not be short of buyers for their MREL bonds, considering their size, premium credit ratings and broad universe of investors. But certain resolution groups, that may have relatively lower credit ratings and contain banking entities that run non-core businesses, could find it trickier, as investors may not be convinced they would be able to avoid a bail-in scenario.

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