Minimum requirements for own funds and eligible liabilities (MREL)
In order for the Debt Office to implement resolution measures, the bank or institution being managed must have a sufficient amount of own funds and liabilities that can be written down or converted into equity. The Debt Office therefore sets a minimum requirement for eligible liabilities for each bank and institution.
MREL is designed to ensure that there are sufficient resources to write down or convert into equity if a bank or other financial institution is in crisis. This allows the central government to intervene quickly in order to maintain the critical operations of that institution, without using tax money. The requirement also helps clarify which lenders are to bear the costs of the crisis management process.
The Debt Office’s MREL policy
MREL is calculated based on institutions’ capital requirements and consists of a risk-weighted and a non-risk-weighted requirement. Both the risk-weighted and non-risk-weighted requirements consist of the sum of a loss absorption amount and a recapitalisation amount. The size of the recapitalisation amount depends on how the institution is to be managed in the event of a crisis. If it is considered that an institution could be managed through bankruptcy proceedings or liquidation, its recapitalisation amount is set at zero.
The requirement is met with capital and certain types of liabilities, known as eligible liabilities. The Debt Office decides on the MREL level and also how much of the requirement is to be met with subordinated eligible liabilities.
Swedish institutions have been subject to MREL since 2018 (see also the link to the Debt Office’s reports on the institutions’ compliance with the requirements). There have been some changes to the Debt Office’s application as a result of the amendments to the Swedish Resolution Act (2015:1016) which came into force on 1 July 2021. In this policy and related decision memorandum, you can read more about the Debt Office’s current method for applying MREL.
English versions of the decision memorandum and MREL-policy will be published at a later date.
Rules for obtaining permission to reduce eligible liabilities instruments
Credit institutions and investment firms subject to MREL must obtain prior permission from the Debt Office in order to call, redeem, repay or repurchase eligible liabilities instruments before their contractual maturity date. The document below describes what an application to the Debt Office for such permission must contain, as well as other relevant information.
Memorandum: Reduce eligible liabilities instruments (only in Swedish).
The fact that an eligible liability may only be repurchased following permission from the Debt Office should be stipulated in the issuance documentation
According to the Debt Office, the terms in Regulation (EU) No 575/2013 of the European Parliament and of the Council (the capital requirements regulation) do not mean that liabilities shall be disqualified from constituting an eligible liability for the sole reason that the issuance documentation (the prospectus) lacks information as to whether the issued liability may only be repurchased following permission from the Debt Office (provided that the liability otherwise fulfils the terms stipulated in Article 72 b of the capital requirements regulation). However, undertakings – in line with the stipulations in the “EBA MREL monitoring report” on pages 27–29 – should, as a matter of protocol, include such information in the issuance documentation.
An institution that has obtained a general prior permission should deduct equivalent amounts from the sum of its eligible liabilities
The EBA has prepared a proposal for technical standards, which includes a specification of the process for obtaining a prior permission for repurchasing eligible liabilities. Article 32b.3 of this proposal, which is expected to be adopted by the European Commission, sets out that the amount for which the resolution authority has granted a general prior permission shall be deducted from the institution’s eligible liabilities from the moment the authorisation is granted.
Pending the entry into force of the technical standards, the Debt Office finds that institutions should, as standard practice, start to make this deduction as of now. The deduction should be made for subordinated eligible liabilities instruments and eligible liabilities instruments which are not subordinated, in relation to the granted amount(s) for general prior permission. An amount including both liabilities categories should be deducted from the institution’s subordinated eligible liabilities instruments.
Swedish insolvency ranking
The Debt office has compiled information on the ranking of items in Swedish insolvency proceedings. The statement is published in accordance with article 8 in commission implementing regulation (EU) 2021/763 of 23 April 2021 laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council and Directive 2014/59/EU of the European Parliament and of the Council with regard to the supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities.
Once every quarter, the Debt Office publishes a report on its monitoring of how systemically important banks and institutions comply with MREL.