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Why MREL won’t help much: minimum requirements for bail-in capital as an insufficient remedy for defunct private sector involvement under the European bank resolution framework

  • Tobias H. TrögerEmail author
Original Article
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Abstract

The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remove the impediments to the desirable incentive effect of private sector involvement (PSI) emanating from a lack of predictability of outcomes, if it compels banks to issue a sufficient minimum of high-quality, easy-to-bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects. The main problem, echoing the general concerns scholars voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus fail to fully alleviate the predicament of investors in bail-in debt. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to correctly gauge the relevant risk of PSI in a bank’s failure at the time of purchase, subsequent adjustments of MREL prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions, and the market discipline that follows from them may prove inadequate and the policy objectives of the regulatory intervention may be missed. The pending European legislation aims to implement the already complex specifications of the Financial Stability Board for Total Loss-Absorbing Capacity (TLAC) by making very detailed and case-specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. Omitted from this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is barely conceivable that the pricing of MREL instruments reflects an accurate risk assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this paper looks in detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework. It concludes with policy recommendations based on the prior analysis.

Keywords

MREL TLAC G-SIB Bail-in Bank resolution 

JEL Classification

G01 G18 G21 G28 K22 K23 

Notes

Acknowledgements

This paper has benefited from comments and critique of friends and colleagues on earlier drafts. Those of Alexander Friedrich, Martin R. Götz, Christos Hadjiemmanuil, Jan Pieter Krahnen and two anonymous referees as well as participants at conferences and workshops held at the Center for Governance Innovation (CIGI), European Banking Institute, the European University Institute, the Florence School of Banking and Finance, the IMFS, McGill University, and the University of Amsterdam were particularly beneficial. The author gratefully acknowledges the financial support of the LOEWE Research Center Sustainable Architecture for Finance in Europe (SAFE).

Copyright information

© Springer Nature Limited 2019

Authors and Affiliations

  1. 1.House of FinanceGoethe-UniversityFrankfurt am MainGermany

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