MREL transparency is long overdue
If MREL is going to be an important line of defence for Europe’s banking system, market participants had better be able to see those defences. At the moment, they are hidden in mists.
The European Union’s Single Resolution Board made a belated step in the right direction last week, when it published its first overview of minimum requirements for own funds and eligible liabilities (MREL) for banks.
MREL is now fairly well understood as a regulatory concept in European financial markets.
The requirements were officially introduced six years ago, as part of the EU’s policy response to the 2008 financial crisis. They force banks to build up new buffers of debt, which resolution authorities are then supposed to be able to bail in if everything goes wrong.
No small amount of sweat has been shed working on MREL in recent years, given its importance.
It is the main driver of issuance in the bank bond markets, as it covers a large part of the industry’s wholesale funding needs. It is also a new measure of a bank’s health, because any breach of the MREL target could have supervisory consequences.
And yet, despite all this, there has been no clear and easy way for market participants to work out how European banks are actually progressing with their MREL needs.
The SRB has published several reports showing how banks’ levels measure up against requirements. But these have been irregular, and they are sometimes unavailable on the SRB’s own website.
Analysts and investors could also trawl through quarterly filings to look for information published by the banks themselves. Even this is no failsafe option, however, due to the wide variety of ways in which banks report on MREL.
Therefore, it was a welcome — and long overdue — step for the SRB to set up an MREL dashboard last week.
The dashboard keeps track of how targets have evolved over time, on an aggregate basis. They also show how banks in different countries have fared in issuing new debt to improve their regulatory ratios.
There is still further to go, as MREL’s importance as a regulatory number increases.
Once member states have implemented the latest Bank Recovery and Resolution Directive (BRRD II), for example, breaching MREL targets will look a lot more like breaching capital buffers.
Instead of facing potentially softer supervisory actions, banks will be forced to calculate their maximum distributable amounts (MDAs) if they drop below their requirements.
This could lead to suspensions of coupon payments on additional tier one capital, discretionary pay packages and — more importantly — equity dividends.
In other words, shareholders will have to start worrying about MREL almost as much as creditors do.
The case for greater transparency about MREL levels has long been apparent, but with the requirements now growing ever more consequential it is now impossible to ignore.