22 April 2022
The European Banking Authority (EBA) published today its annual Report on minimum requirements for own funds and eligible liabilities (MREL). The Report shows progress in closing MREL shortfalls, as of December 2020, which was mostly driven by largest institutions while smaller institutions lagged somewhat behind.
In particular, the Report highlights that 110 resolution groups presented a shortfall of EUR 67.6bn against their end-state MREL targets, set for January 2024 for most of them. This is down from EUR115bn as of December 2019 on a comparable basis. The shortfall for other banks and other systemically important institutions (OSIIs) below EUR50bn is, however, largely stable at EUR30bn. Smaller banks’ lesser progress in closing their shortfall is partly due to the fact that in several jurisdictions their MREL decisions were issued in 2018 or 2019.
With regards to the intermediate target of January 2022, the shortfall was limited. As of December 2020, all global systemically important institutions (G-SIIs) had already met their intermediary target and only 38 out of 260 resolution groups (18 O-SIIs and 20 other banks) had a shortfall of EUR 13.3bn (EUR 10.2bn for O-SIIs and EUR 3.1bn for other banks).
With regards to internal MREL – which allows the down-streaming of loss absorbing capacity from the parent entity to subsidiaries - authorities had made good progress with 128 decisions received by the EBA in the first year of the implementation of the revised Bank Recovery and Resolution Directive (BRRD II), covering 73% of risk-weighted assets expected to receive internal MREL decisions in steady state. 62 non-resolution groups out of a sample of 128 presented an internal MREL shortfall of EUR 36bn.
The MREL sets out the level of resources of sufficient quality that banks should issue to external investors to allow the absorption of losses and their recapitalisation in case of failure. This procedure, called resolution, would require the intervention of the relevant resolution authority that would take over the bank, stabilise it before returning it to private hands, while minimising the use of public funds.
Internal MREL refers to the amount of loss absorbing capacity that should be distributed within the group, typically down streamed from the parent entity to significant subsidiaries.