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MREL (Minimum Requirement for own funds and Eligible Liabilities)

Category — Analytical Metrics
The BRRD (Bank Recovery Regulation Directive 2014/59 / EU) has introduced important changes for banks in resolution due to distress, aimed at protecting the capital integrity of senior creditors. In particular, the bank must have an adequate amount of liabilities subject to bail-in in order to absorb losses and restore capital requirements.

The first prudential requirement for the bank’s sources of funding is summarized in the acronym MREL (Minimum Requirement for own funds and Eligible Liabilities). In essence, this is a minimum capital requirement aimed at ensuring the presence of debt instruments that can be readily liquidated in the event of a failure and capable of absorbing losses without affecting the liquidation procedure of the bank, avoiding improper effects on both stakeholders. institutional priorities, typically depositors and senior bondholders, and on the financial system as a whole.

According to this requirement, three categories of assets are allowed to cover losses: regulatory capital instruments, unsecured subordinated bonds, senior unsecured securities.

The MREL is in addition to another requirement introduced from 2015: the TLAC.

This legal confusion on the differences between TLAC and MREL has led the European Commission to propose an amendment to the BRRD directive called BRRD 2 (EU Directive 2017/2399 / EU). This amendment provides for the introduction for bank issuers of a new class of unsecured bonds, called Senior Non Preferred Bonds. They are Bonds placed at an intermediate level between senior debts with a higher degree of priority and ’junior’ or subordinated debts. In essence, the Senior Non Preferred Bond is a safety buffer that is interposed between the junior and senior liabilities issued by the bank. In this sense, if the conditions exist to initiate the ordinary insolvency procedure, the Senior Non Preferred Bond will be classified both as ’more junior’ than other unsecured senior loans, and as ’more’ senior than subordinated liabilities. Tier 1 or Tier 2 type.

MREL and TLAC differ in: • Issuers: EU banks in the MREL case and only G-SIIs (Global Systemically Important Institutions) in the TLAC case; • Effective date: from 1 January 2016 for MREL, from 1 January 2019 for TLAC; • The calculation basis: all sources in the MREL case, only RWAs (Risk Weighted Assets) for the TLAC; • Deductibility for the purposes of calculating the capital requirement: none for MREL, of the ’TLAC compliant’ instruments that the issuing bank already has in its portfolio issued by other G-SIIs in the TLAC case; • Capital requirement: 100% for MREL, 16% and 19% of RWAs from 2019 to 2022 respectively for TLAC; • Subordination: primary requirement to apply the TLAC, not necessary but possible requirement in the MREL case.
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