"Total Assets" versus "Risk Weighted Assets": Does it Matter for MREL Requirements?

04-07-2016

The Bank Recovery and Resolution Directive (BRRD) foresees a minimum requirement for eligible liabilities and own funds (MREL) that banks need to comply with, to ensure the effectiveness of the bail-in tool. A discussion is currently on-going on how MREL should be constructed in practice. In this paper, we look at alternative ways to compute the requirements, showing how the choice of the benchmark metric (between Risk Weighted Assets, Total Assets or Leverage Exposure) can change the allocation of requirements across banks. We also review MREL in light of the global effort to ensure future resolvability of banks, highlighting some differences and inconsistencies with the FSB’s Total Loss-Absorption Capacity (TLAC) measure.

The Bank Recovery and Resolution Directive (BRRD) foresees a minimum requirement for eligible liabilities and own funds (MREL) that banks need to comply with, to ensure the effectiveness of the bail-in tool. A discussion is currently on-going on how MREL should be constructed in practice. In this paper, we look at alternative ways to compute the requirements, showing how the choice of the benchmark metric (between Risk Weighted Assets, Total Assets or Leverage Exposure) can change the allocation of requirements across banks. We also review MREL in light of the global effort to ensure future resolvability of banks, highlighting some differences and inconsistencies with the FSB’s Total Loss-Absorption Capacity (TLAC) measure.

Ekstern forfatter

Bennet Berger, Pia Hüttl and Silvia Merler