MREL

MREL is a prudential requirement imposed on banks in the European Union to ensure that, if a bank fails, there is a sufficient stack of liabilities that can be written down or converted into equity to absorb losses and recapitalise the institution without recourse to taxpayer money. It is the EU's operational tool for making the "bail-in" principle credible.

The requirement was introduced by the Bank Recovery and Resolution Directive (BRRD) in 2014 and substantially revised by BRRD II (Directive (EU) 2019/879) and the related CRR II package, which aligned MREL more closely with the international Total Loss-Absorbing Capacity (TLAC) standard developed by the Financial Stability Board for global systemically important banks (G-SIBs).

MREL is set on a case-by-case basis by the resolution authority — the Single Resolution Board (SRB) for significant banks in the Banking Union, and national resolution authorities otherwise. It is expressed as a percentage of both risk-weighted assets (RWA) and the leverage ratio exposure measure, and consists of two components:

• a loss absorption amount, broadly equivalent to the bank's capital requirements; and
• a recapitalisation amount, sized so the bank can be restored to viability after resolution.

Eligible instruments typically include Common Equity Tier 1 capital, subordinated debt, and certain senior unsecured liabilities that meet criteria on maturity (residual term over one year), are not secured, and are not deposits preferred in the creditor hierarchy. Many jurisdictions, including France, Germany, Spain and Italy, introduced a senior non-preferred debt class specifically to issue MREL-eligible paper.

For G-SIBs, MREL must be at least as strict as TLAC, which sets a floor of 18% of RWA and 6.75% of the leverage exposure from 2022 onwards. Breaches can trigger restrictions on dividends, bonuses and AT1 coupons via the M-MDA (Maximum Distributable Amount) mechanism.