Minimum requirement for own funds and eligible liabilities

For resolution to be undertaken, institutions must have a certain amount of own funds and liabilities that can be used to cover losses and restore the capital base. Each institution is therefore subjected to a minimum requirement for own funds and eligible liabilities (MREL).

The minimum requirement is intended to ensure that there are sufficient liabilities which can be bailed in and, where needed, converted into own funds if an institution fails. This allows the resolution authority to maintain the institution's critical operations without the use of taxpayers' funds. The requirement also helps clarify which creditors will primarily bear the costs of managing the crisis.

The Debt Office is responsible for setting the size of the minimum requirement based on rules set out in national legislation and relevant EU rules. Institutions are required to meet the requirement from 1 January 2018. Over and above setting the size of the requirement, the Debt Office will also evaluate how the requirement is met.

The size of the minimum requirement

The minimum requirement is the sum of an amount needed to absorb losses and an amount to restore the capital base. The loss absorption amount is roughly equivalent to the institution's total capital requirement (with the exclusion of certain components). The recapitalisation amount is intended to allow the capital to be restored so that the institution, after resolution, meets the existing capital requirements again.

For smaller institutions deemed possible to place in bankruptcy or liquidation, the recapitalisation amount will be zero. The minimum requirement for these institutions will thus not exceed their capital requirements.

For details on the Debt Office's method for setting the minimum requirement, see Application of minimum requirement for own funds and eligible liabilities (MREL), pdf.

How the minimum requirement is met

In order to ensure that the institutions can be managed through resolution, the Debt Office will, in addition to deciding the on size of the minimum requirement, also assess how institutions are meeting the requirement. This assessment will be done based on the complying with the following principles:

  • Liability proportion: The minimum requirement must be met with a certain proportion of liabilities (applicable as of 2018). Since the proportion corresponds to the size of the recapitalisation amount, this principle is not applicable for institutions deemed possible to manage through bankruptcy or liquidation.
  • Subordination: The minimum requirement must be met in full with subordinated instruments (applicable as of 2022). The liabilities being subordinated means that they are bailed in before other liabilities such as deposits from major companies or senior unsecured bonds.

If the principles are not adhered to, the Debt Office will assess if there are substantive impediments to resolution.

For more information about the principles for meeting the requirement, see Application of minimum requirement for own funds and eligible liabilities (MREL), pdf.

Subordinated liabilities built up gradually

Requiring subordination of the liabilities used to meet the requirement means that institutions must replace part of their current funding with new subordinated liabilities. Institutions are allowed to successively build up the volume of subordinated liabilities required in the period until 2022. During the transitional period, the Debt Office will monitor the build-up to ensure that it is progressing at a reasonable pace.

MREL reporting

The Swedish Financial Supervisory Authority (FI) and the Swedish National Debt Office require quarterly information to be submitted on how banks and other institutions with operations that the Debt Office deems critical for financial stability meet MREL. The reporting is submitted to FI.