Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

The minimum requirement for own funds and eligible liabilities (MREL) is a rule in the European Union and the United Kingdom that obliges each bank to maintain enough capital and suitable debt to absorb its losses and rebuild its capital if it fails. The aim is to make a bail-in credible: the authorities should be able to write down or convert these instruments and keep the bank's critical services running, without the public bail-out that many governments provided during the financial crisis of 2007 to 2009.

MREL was created by the Bank Recovery and Resolution Directive of 2014 and substantially revised in 2019. It is set bank by bank by the resolution authority, not the prudential supervisor, and it sits alongside ordinary capital requirements. Its global counterpart is total loss-absorbing capacity (TLAC), a standard that applies only to the largest international banks, whereas MREL applies in principle to every bank in scope of the directive.

The requirement follows from the bank's resolution strategy, which is decided in resolution planning. It has two parts. The loss absorption amount covers the losses a failing bank would need to absorb and is based on its existing capital requirements. The recapitalisation amount is what would be needed afterwards to restore capital so that the bank, or the part of it that continues, again meets the conditions for authorisation and retains market confidence.

For a small bank that would simply be placed into insolvency, there is nothing to recapitalise, so MREL equals the loss absorption amount and is met by its normal capital. For a bank that would be resolved through bail-in, the requirement is roughly double its capital requirements, with adjustments. MREL is expressed in two ways, as a percentage of risk-weighted assets and as a percentage of the exposure measure used for the leverage ratio, and the bank must meet both.

MREL can be met with regulatory capital and with certain other liabilities. Capital comprises Common Equity Tier 1, Additional Tier 1 and Tier 2 capital. Eligible liabilities are forms of bail-inable debt that meet set conditions:

• Remaining maturity. The instrument must have at least one year left before it falls due.
• Unsecured and fully paid. It must not be secured, guaranteed by the bank itself or funded by the bank.
• Not excluded. Covered deposits, secured liabilities, short-term interbank funding and liabilities arising from derivatives are among the items that do not count.
• Enforceable write-down. Debt issued under the law of a country outside the regime must contain a contractual clause recognising bail-in powers.

Authorities also set a subordination requirement for larger banks, meaning that part of MREL must be met with instruments that rank below ordinary operating liabilities. This reduces the risk that bailing in senior creditors would leave them worse off than in insolvency, which the law forbids. To supply such instruments, European countries created a class of senior non-preferred debt ranking between subordinated debt and ordinary senior debt.

Within the euro area's banking union, the Single Resolution Board sets MREL for significant banks and cross-border groups, and national resolution authorities do so for others. In the United Kingdom, which kept the regime after leaving the European Union, the Bank of England sets it. Requirements are set for the resolution entity, usually the parent, and internally for major subsidiaries, so that losses in a subsidiary can be passed up to the parent without the subsidiary itself entering resolution.

Banks were given transitional periods to build up their holdings, with the main European deadline for full compliance falling at the start of 2024. A bank that falls short faces restrictions on dividends, bonuses and coupon payments on capital instruments, and the authority may require a plan to restore the position. Banks report their MREL regularly and publish it as part of Pillar 3 disclosure.

Capital used to meet the risk-based MREL cannot be counted again towards the combined buffer requirement, which includes the capital conservation buffer. The buffers therefore sit on top of MREL as well as on top of minimum capital. This prevents a bank from appearing to have spare capital that is in fact already committed to supporting its resolution.

MREL raises funding costs, since loss-absorbing debt is more expensive than deposits or senior borrowing, and the burden is heaviest for medium-sized banks that are funded mainly by deposits and have little experience of issuing in bond markets. Some of these banks have sold eligible debt to their own retail customers, raising concerns about who would actually bear losses. The rescue of Credit Suisse in 2023, which was handled through a state-backed takeover rather than the planned bail-in, led to debate about whether authorities will use the tools as designed when a large bank fails quickly.

• Single Resolution Board
• European Banking Authority
• Bank of England