Germany: SRB's 2018 MREL Policy: Setting The Standard For The First Wave Of Resolution Plans

Last Updated: 14 January 2019
Article by Michael Huertas

QuickTake: What next for Minimum Requirement for Own Funds and Eligible Liabilities (MREL)?

European credit institutions i.e. banks have been required to comply with the EU's MREL requirement, which was introduced in 2014 and substantially updated in 2017. MREL consists of own funds and part of the institutions' liabilities. If an institution fails and goes into a regulatory led resolution process, the MREL acts as a buffer to absorb losses and provide new regulatory capital to the institution as well as being capable of becoming subordinated (despite some on-going disagreement on how/when that is possible). The recapitalization also assists with providing stability for the firm to perform its "critical functions" and fulfil obligations with creating (further) additional systemic risk.

Shares, other capital instruments and certain debt instruments can be MREL eligible, thus allowing issuers to be compliant with "their" MREL requirements. MREL, which is an EU-wide regime, is set by the Member State resolution authority (NRAs) on an institution-by-institution basis, depending on preferred resolution strategy. Whilst there is no minimum level of MREL, the BRRD sets out criteria which the resolution authority must consider when setting it. In the Eurozone, the relevant authority is the Single Resolution Board (SRB) that leads the NRAs to make up the Single Resolution Mechanism (SRM) as the second pillar to the Banking Union. 

Globally systemically important banks (G-SIBs)1  are required to comply with the Total Loss Absorbing Capacity (TLAC) standard as of January 1, 2019. MREL and TLAC share the same supervisory aims with TLAC being more detailed in what is permitted. With recovery and resolution as well as the EU policy to harmonize national insolvency laws, and with creditor hierarchy2 very much back in the focus at the outset of 2019, notably in the Eurozone following some worrying outlook for certain Banking Union Supervised Institutions (BUSIs), the SRB MREL policy matters and so does compliance in order to remain resolvable both for BUSIs and non-Banking Union credit institutions given the cascade effects. 

This SRB policy represents a common approach to ensure consistency and a level playing field within the Banking Union and takes into account where necessary any bank-specific features. The publication of the SRB's 2018 MREL Policy3 marks a key update to existing SRB guidance from 2017, and with the SRB looking to complete the setting of binding individual and group MREL targets for relevant BUSIs by 2020, this Client Alert assesses some of the key specifics that firms might want to consider ahead of SRB communicating MREL Decisions throughout 2019. Some market commentators have become warned that MREL-deficit amongst BUSIs could occur. Others have expressed concern that while MREL is EU-wide, there are some very different conditions for issuers and funding conditions between the core and periphery EU Member States. This fragmentation is a barrier in terms of issuance costs and ease of issuance.  Equally, MREL Decisions and the transition to 2022 comes at a busy time of the ECB, in its supervisory  Single Supervisory Mechanism (SSM), publishing further supervisory expectations in respect of ILAAP and ICAAP as well as taking supervisory actions.4 This will matter equally to those issuers of MRELs inasmuch as holders i.e., investors.5

Why now?

MREL corresponds conceptually to the minimum amount of loss-absorbing capacity that is also covered by the international standard of TLAC developed by the Financial Stability Board. It was enacted in the BRRD in May 2014 for all banks. The SRB foresees a transitional two-step approach to the MREL-setting process for the 2018 planning cycle. This year's cycle is split into two waves—the first one started in January 2018 and allowed for banks that did not have binding targets in 2017 to be addressed first based on an MREL Policy. This document acts as a point of reference for the determination of SRB Decisions on MREL for these BUSIs during 2019. 

The SRB 2018 MREL Policy updates the general MREL approach finalized in 2017, by adding a few additional features. First, the MREL policy now caters for all resolution tools, and not only for strategies based on an open-bank bail-in. Second, the MREL policy removes the reference to the Basel I floor in the MREL formula.

While the SRB 2018 MREL Policy does not specifically mention Brexit, the SRB has communicated its concerns that the size of outstanding MREL eligible issuances with a nexus to the UK and/or English law of the law of a third-country may mean that UK courts or a third-country court may cease to recognize the resolution actions of EU authorities such as bail-in.6 While the SRB considers that the issuance of liabilities under the laws of one of the Member States of the EU-27 might alleviate such concerns, it is equally important that the place of performance/issuance or dispute resolution venue is the law of a Member State of the EU-27. At the time of writing of this Client Alert, it remained unclear whether any fully binding transitional arrangement or other form of regulatory relief would be introduced (possibly out to 2024) to account fully for recognition issues.

Moreover, as the European Banking Authority (EBA) has announced that in its 2019 Work Programme it will focus on MREL quality and supervision, given that it—like the SRB—has found poor data quality, including in respect of the Liability Data Report (LDR) exercises. Equally, the EBA and SRB are both monitoring and preparing for the impact of Brexit on MREL, while concurrently forward-planning for the range of technical delivery on the EU's "Banking Package," i.e. the reforms known as CRR 2/CRD V, SRMR 2 and BRRD 2. Agreement on the Banking Package presented a relief for a range of BUSIs that are comparably "less risky" and brought convergence on how to comply closer with TLAC and MREL. As part of the SRB's data quality improvement efforts, there is an expectation, especially due to the Banking Package, that various divergences and differences stemming from national options and discretions will be streamlined by the SRB much in the same way as the SSM undertook a similar exercise in 2016 and 2017 in terms of how the CRR/CRD IV regime is applied within the Banking Union. The SRB has also announced its focus on operationalizing "internal MREL," which like TLAC permits a subsidiary in a banking group to be recapitalized by the parent company without subjecting the company to a formal resolution procedure.

January 1, 2019 also marked the start of G-SIBs needing to meet a weighted TLAC requirement of at least 16% in risk-weighted assets and an unweighted requirement of at least 6% expressed in the same denominator as the leverage ratio. From January 1, 2022 these levels increase to 18% and 6.75%.  With the former EBA Chairman, now the Supervisory Chair at the ECB's Single Supervisory Mechanism, having called for the SRB to publish MREL requirements, this sharpens the tone even further.

SRB 2018 MREL Policy Methodology

A – Targets and Location

The MREL policy builds upon the delegated regulation (DR)7 default formula which consists of two components: (i) a default loss-absorbing amount (LAA), which reflects the losses that a bank will incur in resolution, and (ii) a recapitalization amount (RCA), which reflects the capital needed to meet ongoing prudential requirements after resolution. MREL targets are based on fully-loaded risk weighted assets (RWAs) and fully loaded capital requirements.

The leverage ratio remains excluded from the MREL formula, and now the Basel I floor has also been removed from the MREL requirements. MREL targets will be set using supervisory and resolution reporting data from the previous year.

The SRB does not adjust the default LAA. In accordance with the DR, the SRB considers the default LAA the sum of a bank's minimum capital requirement (Pillar 1 requirement), its Pillar 2 requirement (P2R), and its fully loaded combined buffer requirement (CBR).

The default RCA is the starting point for a MREL determination. Under the DR, the RCA is composed of: the minimum requirement for authorization (P1 and P2R) and an amount intended to regain market confidence, the MCC.

Banking groups which prefer liquidation as a resolution strategy have no RCA. Where the preferred strategy at the level of the group is liquidation, MREL will be set at the level of the LAA, with no RCA and no MCC. Bank-specific adjustments are considered on the basis of the DR. The DR enables resolution authorities to make bank-specific adjustments to three components of the RCA, including the MCC.

The SRB may allow, on a bank-by-bank basis, three adjustments to the RWA basis. These adjustments relate to:

  1. The effect of balance sheet depletion: "The failure of a banking group may result in the banking group having a smaller balance sheet directly following resolution, particularly if the failure was due to credit risk losses. The SRB considers that, on a group-by-group basis, a maximum balance sheet depletion of up to 10% of total assets may be used to adjust the RWA basis."
  2. The use of recovery options: "The SRB will consider only those limited recovery options that can be implemented swiftly as a resolution action, assuming that the bank was unable to use them in the early intervention or recovery phase."
  3. Restructuring plan divestments and sales: "If actions as formulated, and restructuring plans  are legally binding and time-bound, the SRB may take into account the possible impact on the bank's RWA basis. These plans aim to restore the long-term viability of the bank by achieving sustainable profitability and reducing risk, among other goals. This includes the removal from the balance sheet of riskier assets with associated higher risk weighting through mandatory deleveraging actions embedded in the restructuring plan."

No further adjustments to the default RCA and MCC are foreseen.

Other bank-specific adjustments are taken into account for the overall MREL target

The SRB maintains the reference to an 8% total liabilities and own funds benchmark. No adjustments to MREL targets for the first wave of resolution plans are foreseen. "This relates in particular to (i) liabilities mandatorily excluded from bail-in under Article 44(2) of the BRRD, for which preliminary assessments are conducted in resolution plans to assess the possible risk of breaching the no creditor worse off (NCWO) principle when applying the bail-in tool; (ii) liabilities that are likely to be excluded in exceptional circumstances under Article 44(3) of the BRRD and (iii) deposit guarantee scheme (DGS) contributions. The SRB considers that taking into account DGS contributions would not be consistent with the preferred resolution strategy for most of the banking groups under its direct responsibility."

Specificities of multiple points of entry strategies are addressed

The SRB MREL policy addresses multiple points of entry (MPE) strategies. The aim is to limit contagion risk. The SRB MREL policy identifies the requirement for a consolidated MREL target at the level of the resolution entity, within the MPE group.

Calibration for transfer strategies

To use transfer strategies, resolution plans need to make sure banks meet the standards in terms of seperability and data availability and analyse the market.

The SRB keeps the LAA consistent with its approach to bail-in. The RCA is adjusted downwards to reflect the transfer of assets. This MREL approach to transfer strategies is an interim step towards a more tailored approach.

B - Quality, Subordination and Eligibility Criteria

Subordination policy

Subordination improves resolvability. It also reduces the risk of breaching the NCWO principle. Subordination policy consists of two elements: (i) a general level depending on the systemic importance of banks and (ii) a potential bank-specific add-on to address NCWO risks based on mandatory exclusions. This (ii) is used for monitoring purposes only. The assessment of compliance with the relevant subordination levels takes into account all forms of subordination, including 'senior non-preferred' instruments, subject to analysis in line with national laws. The SRB is keen to stress that it reserves the right to adjust this policy at a later stage in light of the future design of the BRRD and further development of the MREL policy.

Banks are expected to have a minimum level of subordinated instruments, depending on their size and systemic importance. "The SRB also monitors an NCWO add-on related to mandatory exclusions from bail-in. In the next wave of resolution plans, the SRB has committed to refine further its subordination policy and the approach to NCWO issues."

Eligible liabilities and own funds are taken at consolidated level

Compliance with binding targets is assessed against eligible liabilities and own funds at consolidated resolution group level. The SRB considers a hybrid approach to assessing banks' future compliance with MREL targets for the next cycle.

Structured notes are mostly excluded

In line with the 2017 SRB policy, structured notes remain excluded in the 2018 SRB MREL Policy. However, the SRB will assess on a case-by-case basis the eligibility of such liabilities:

  1. when a given amount of the liability arising from the instrument is known in advance at the time of issuance, is fixed (i.e. the amount cannot go below a minimum floor) and is not affected by a derivative feature;
  2. if the instrument, including its derivative feature, is not subject to any netting agreement and its valuation is not subject to Article 49(3) of the BRRD;
  3. only up to the amount of the liability that complies with point 1 (i.e. for the fixed floor of the liability that would have to be paid)."

Non-covered non-preferred deposits breakable below one year are excluded

Non-covered (i.e. non-DGS) non-preferred deposits will continue to be excluded if they can be withdrawn within a one-year horizon. "Some term deposits may have an early redemption clause that would have to be taken into account in the maturity assessment (Article 45(4) of the BRRD)." 

Liabilities held by retail investors are MREL-eligible

The SRB does not see any legal basis for resolution authorities to exclude ex ante and uniformly eligible liabilities held by natural persons or small- and medium-sized enterprises from MREL or from bail-in. However, holdings of subordinated or senior instruments by retail customers might be an impediment to resolution.  These statements build upon—but should also be read in conjunction with—the EBA's own supervisory Statement on the treatment of retail investors holding MREL eligible instruments in the context of resolution as well as how issuers may want to approach issuance of MREL eligible instruments to ensure compliance with MiFID II/MiFIR obligations including avoiding conflicts of interest.8

Liabilities issued under third country law or by entities outside the EU are mostly excluded

Liabilities issued by banks located outside the EU are not recognized as MREL eligible and Banks are expected to be proactive with regards to the impact of Brexit.

C - Transition Period

Bank-specific transition periods will support banks' efforts to reach MREL targets and binding MREL targets are set with a bank-specific transition period.

Conclusion and next steps

The SRB's first wave of resolution plans updates the 2017 MREL approach and introduces new elements. For example, the applicable policy for banks subject to transfer strategies is an additional step to tailoring MREL targets to bank-specific features. The overall degree of resolvability within the Banking Union is also likely to be strengthened via the SRB setting binding decisions for a much wider scope of banking groups. The development of the MREL policy will continue in 2019 for the second wave of resolution plans affecting those BUSIs with "Resolution Colleges." The SRB aims to update its general MREL policy, paying particular attention to subordination, eligible instruments and individual MREL targets.

MREL decisions are reviewed annually. Thus, the SRB will continue its review practice and will also take into consideration changes stemming from supervisory decisions or linked to the evolution of banks' risk profiles and overall structures during the course of 2019 and its overall goal to get MREL fully embedded by 2020.

For affected BUSIs, in addition to building upon their MREL readiness projects and reviewing contractual terms for legacy and existing issuances, may wish to consider the following questions, given the SRB's own supervisory priorities through to 2020 and those of the ECB-SSM.9 Part of this is also accentuated by the ECB's announced 2019 Liquidity Stress Test10 and greater use of on-site inspections, plus a more intensive application of the SSM run SREP as well as the SRB and SSM both pushing to improve better data quality, specifically for recovery and resolution planning and its operationalization.

  1. Are systems and controls in place to proactively designate and monitor financial instruments as MREL-eligible?
  2. Is there a sufficient periodic and documented understanding amongst stakeholders of the scope, breadth and cost of "critical functions" within a firm?
  3. Is there sufficient investor facing disclosure to flag risks of holding MREL-eligible instruments; are sufficient measures in place to prevent conflicts of interest in relation to self-placement of instruments?
  4. Are there sufficient systems and controls in place to be able to own one's exposure and that of key counterparties to MREL eligible instruments whether as holder and/or as a collateral asset?
  5. What fallbacks are in place, both in terms of timing and location of issuance, to avoid herd behavior, being left behind the crowd and/or due to uncertain macroeconomic pressures potentially impacting issuance of a certain class or blend of types of MREL eligible financial instruments, which themselves may price more expensively in terms of wide spreads compared to say senior debt?
  6. How agile are BUSIs and other credit institutions placed to respond to changing circumstances caused by actions of the SRB in respect of non-Banking Union MREL requirements and issuances?
  7. Can legacy MREL eligible instruments be amended to become Brexit-proofed?

All of these questions may require fast-paced action during what is set to be an eventful 2019 and road to 2022. 


1 Approximately 30 globally of which 13 are headquartered in the EU.

2 Directive (EU) 2017/2399 requires Member States to create a new class of 'non-preferred' senior debt, eligible to meet the subordination requirement of the TLAC standard and had a transposition deadline of 29 December 2018.

3 Read more here

4 See also our Eurozone Hub coverage on the operationalization of Recovery and Resolution Plans

5 The EBA has already published its supervisory expectations on how to deal with retail investor holdings in MREL-eligible instruments. Click here for more details.

6 This interpretation may be a narrow reading of Art. 45 BRRD, but one where both the EBA and SRB have made their supervisory concerns and expectations clear, and done so since 2017 including in the publication of their Supervisory Principles on Relocations (SPoRs) – See our dedicated coverage on this.

7 Commission Delegated Regulation (EU) 2016/1450.

8 See Footnote 2.

9 Please see our dedicated coverage from our Eurozone Hub on this development.

10 Which is, besides not only being a SSM supervisory tool, a development that might support Elke König, Chair of the SRB's calls for a specific liquidity resource to add to the existing Recovery and Resolution Toolkit at the disposal of the SRB but EU NRAs more generally.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions