Why MREL Won't Help Much

Journal of Banking Regulation Vol. 19, 2018, Forthcoming

SAFE Working Paper No. 180

European Banking Institute Working Paper No. 13

30 Pages Posted: 23 Aug 2017 Last revised: 2 May 2018

Tobias H. Troeger

Goethe University Frankfurt - Research Center SAFE; European Corporate Governance Institute (ECGI); European Banking Institute

Date Written: August 21, 2017

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 so may.

The pending European legislation aims to implement the already complex specifications of the Financial Stability Board (FSB) 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

Suggested Citation

Tröger, Tobias Hans, Why MREL Won't Help Much (August 21, 2017). Journal of Banking Regulation Vol. 19, 2018, Forthcoming; SAFE Working Paper No. 180; European Banking Institute Working Paper No. 13. Available at SSRN: https://ssrn.com/abstract=3023185 or http://dx.doi.org/10.2139/ssrn.3023185

Tobias Hans Tröger (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/researchers-details/showauthor/prof-dr-tobias-troe

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

European Banking Institute ( email )

Frankfurt
Germany

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