The European Commission’s Delegated Regulation on MREL

Delegated Regulation

On 23 May 2016, the European Commission issued a Delegated Regulation which specifies the criteria that resolution authorities will need to consider when setting the minimum requirements for own funds and eligible liabilities (MREL) – or easily ‘bail-inable’ instruments’ – for the purpose of loss absorption and recapitalisation of banks.

The Bank Recovery and Resolution Directive (BRRD) requires the resolution authorities to draft resolution plans for banks, outlining options for applying resolution tools and powers. Resolution plans should also include a minimum requirement for MREL for each bank and a deadline by which to achieve it. BRRD does not set a harmonised minimum of MREL.

Setting MREL

Article 4 of the Delegated Regulation provides that, in setting the level of MREL, the resolution authority shall take into account information gather from and outcomes of the supervisory review and evaluation process (SREP), in particular:

• A summary of the assessment of the business model, funding model, and overall risk profile of the bank;
• A summary of the assessment of whether capital and liquidity held by the bank ensures sound coverage of the risks posed by the bank’s business model, funding model and overall risk profile;
• Information on how risks and vulnerabilities arising from the business model, funding model and overall risk profile identified in SREP are reflected in additional own fund requirements applied to a bank pursuant to SREP.

Business Model Analysis (BMA) under SREP is the top priority for the Single Supervisory Mechanism (SSM) of the ECB. It is now clear that information on this element is also critical to the ECB’s Single Resolution Board (SRB) in the setting of MREL levels for inclusion in resolution plans.

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