What Are the Determinants of Mrel- Eligible Debt Yields? Evidence From the EU Banking Sector

27 Pages Posted: 17 Dec 2020

See all articles by Maria Rocamora Fernandez

Maria Rocamora Fernandez

European Banking Authority

Nuria Suárez

Universidad Autónoma de Madrid

Manuel Monjas

Universidad Autónoma de Madrid

Date Written: September 15, 2020

Abstract

We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)‐eligible debt yields in a sample of 63 European banking groups during the period 2009Q3–2019Q2 in 14 European countries. We conclude that MREL‐eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL‐eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and non‐ systemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particularregarding bank and marketrisk variables. Our model also suggests that investors closely monitor senior non‐preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non‐preferred issuances. Credit ratings are seen as a high‐credibility tool, helping investors in the market to better exercise market discipline.

Keywords: MREL, debt yield, market discipline, bank risk, Banking Package, BRRD, European Banking Union

Suggested Citation

Rocamora Fernandez, Maria and Suárez, Nuria and Monjas, Manuel, What Are the Determinants of Mrel- Eligible Debt Yields? Evidence From the EU Banking Sector (September 15, 2020). European Banking Authority Research Paper No. 9, Available at SSRN: https://ssrn.com/abstract=3749293 or http://dx.doi.org/10.2139/ssrn.3749293

Maria Rocamora Fernandez (Contact Author)

European Banking Authority ( email )

20 avenue André Prothin CS 30154
One Canada Square, Canary Wharf
92927 Paris, La Défense CEDEX E14 5AA
France

Nuria Suárez

Universidad Autónoma de Madrid ( email )

Campus Cantoblanco
C/Kelsen, 1
Madrid, Madrid 28049
Spain

Manuel Monjas

Universidad Autónoma de Madrid

Campus Cantoblanco
C/Kelsen, 1
Madrid, Madrid 28049
Spain

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