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.
Calculating MREL – measures reciprocated by Finansinspektionen
The Debt Office uses an institution’s capital requirements imposed by Finansinspektionen (the Swedish Financial Supervisory Authority) as a starting point for calculating MREL. Finansinspektionen has reciprocated the decision by foreign authorities to implement systemic risk buffers to ensure equal treatment for institutions that operate in several markets.
This means that the application of capital requirements for Swedish institutions’ exposures in foreign countries will correspond to the application in the respective country. It follows that foreign systemic risk buffers reciprocated by Finansinspektionen will also be included in the calculation of the market confidence charge that is part of the Debt Office’s MREL requirements.
At the time of the decision, the Debt Office bases its calculation of MREL on the capital requirements most recently set by Finansinspektionen. The reference date for these requirements is normally 31 December of the immediately preceding year. If justified, with consideration for circumstances that have a material impact on MREL, that decision may be based on information from another reference date.
Provisions on 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. Provisions regarding the application process are found in Commission Delegated Regulation (EU) No. 241/2014 of 7 January 2014 supplementing Regulation (EU) No. 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for own funds and eligible liabilities requirements for institutions. The regulation also sets forth what kinds of liabilities are subject to the requirement for permission and more specifically what class of institutions must apply for permission. Institutions for which MREL does not exceed the loss absorption amount are also subject to the requirement for obtaining permission to reduce eligible liabilities instruments.
Application and processing time
The application shall contain the institution's contact person(s) information. that apply for permission are to pay a fee of SEK 35,700.
The processing time, which begins from the day the fee is paid and the application is complete, is up to four months for a new application and three months for an application to extend a general prior permission. The application may be denied if the fee is not paid. Commission Delegated Regulation (EU) No. 241/2014 contains provisions on what information needs to be provided in the application.
An institution that has obtained a general prior permission must deduct corresponding amounts from the sum of its eligible liabilities
Commission Delegated Regulation (EU) No. 241/2014 contains provisions on the requirement for institutions to deduct from the sum of eligible liabilities the amount for which it has obtained prior permission. The European Banking Authority (EBA) has published answers to questions about how the deduction is to be made, in its question-and-answer tool (Single Rulebook Q&A).
The issuance documentation should state that an eligible liability may only be reduced with permission from the Debt Office
According to the Debt Office, the terms of Regulation (EU) No. 575/2013 of the European Parliament and of the Council – the capital requirements regulation (CRR) – do not entail that liabilities are to be disqualified from constituting an eligible liability solely if the issuance documentation (prospectus) lacks the information that the issued liability may only be reduced by permission of the Debt Office (provided that the liability otherwise fulfils the terms and conditions set forth in Article 72 b of the CRR). However, in line with what is stated in the EBA MREL monitoring report, as a matter of protocol institutions should include such information in the issuance documentation.
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.