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

04-07-2016

The bail-in of creditors forms a critical element within the new European bank recovery and resolution mechanism. The bail-in must ensure that indeed creditors instead of taxpayers absorb a bank`s losses under ordinary circumstances. In order to allow an orderly bail-in to happen it is important that banks, among others, have sufficient loss-absorbing capacity. This so-called ‘minimum requirement for own funds and eligible liabilities’ (MREL) is currently based on a combination of indicators that are translated into a ratio as a percentage of total liabilities plus own funds. In this paper distribution across banks for the total liabilities plus own funds and the two alternative indicators risk-weighted assets and leverage exposure – are assessed. The results show, based on a sample of 90 euro-area banks subject to direct supervision of the Single Resolution Board, that the difference between leverage exposure and total liabilities plus own funds is limited across the four different variables applied to categorise banks, namely supervisory, size, business models and ownership structures. In turn, the application of a risk-weighted and assets-based ratio substantially changes the distribution, with relatively lower average requirements for systemically relevant, larger, more market-oriented and publicly owned banks.

The bail-in of creditors forms a critical element within the new European bank recovery and resolution mechanism. The bail-in must ensure that indeed creditors instead of taxpayers absorb a bank`s losses under ordinary circumstances. In order to allow an orderly bail-in to happen it is important that banks, among others, have sufficient loss-absorbing capacity. This so-called ‘minimum requirement for own funds and eligible liabilities’ (MREL) is currently based on a combination of indicators that are translated into a ratio as a percentage of total liabilities plus own funds. In this paper distribution across banks for the total liabilities plus own funds and the two alternative indicators risk-weighted assets and leverage exposure – are assessed. The results show, based on a sample of 90 euro-area banks subject to direct supervision of the Single Resolution Board, that the difference between leverage exposure and total liabilities plus own funds is limited across the four different variables applied to categorise banks, namely supervisory, size, business models and ownership structures. In turn, the application of a risk-weighted and assets-based ratio substantially changes the distribution, with relatively lower average requirements for systemically relevant, larger, more market-oriented and publicly owned banks.