The compliance of banks with MREL requirements – Q2 2020
News 27 August 2020
At the end of the second quarter, all banks complied with the minimum requirements for own funds and eligible liabilities (MREL requirements) set by the Swedish National Debt Office. This is presented in the Debt Office’s latest quarterly report published today.
If a systemically important bank or financial institution experiences a crisis, the Debt Office can assume control of it and implement crisis management measures to safeguard financial stability. This procedure, called resolution, is intended to enable the central government to manage an institution in crisis without having to resort to using taxpayers’ money to rescue it. Instead, the institution’s shareholders and investors are to bear the costs of crisis management.
Requirements for a certain amount of own funds and liabilities
As a way to ensure that institutions have sufficient resources to finance the crisis management, the Debt Office sets requirements for them to have a certain level of own funds and liabilities that can be used to absorb losses and to restore capital in a crisis. Accordingly, the Debt Office makes annual decisions on minimum requirements for own funds and eligible liabilities (MREL requirements).
The Debt Office publishes a quarterly report on how well the institutions are meeting these requirements. The most recent report, published today, presents MREL compliance as of the end of the second quarter of 2020. It shows that all systemically important institutions met the requirements.
The report also shows that all the institutions had a sufficient amount of liabilities required to comply with the Debt Office’s liabilities proportion principle.
In accordance with the principle for the subordination of liabilities, these liabilities shall, starting 1 January 2024, consist of a specific type of debt called subordinated liabilities. The report shows that, on 30 June 2020, the institutions had issued subordinated liabilities amounting to approximately SEK 61 billion, which corresponds to approximately 20.4 per cent of the total issuance requirement.
Resolution – the central government assumes control
Resolution is only applied for systemically important banks or other financial institutions. The Debt Office conducts an annual assessment of which institutions are to be considered systemically important. During the resolution procedure, the institution continues its operations so that customers have access to their accounts and other services as usual.
Deposit insurance always applies
Protection for depositors is the same regardless of whether an institution goes into bankruptcy or is resolved through resolution.
Banks build up eligible liabilities
For the Debt Office to be able to carry out resolution effectively, the bank or institution must have sufficient own funds and liabilities that can be written down or converted into equity. Therefore, the Debt Office decides on a minimum requirement for eligible liabilities (usually referred to by the abbreviation MREL) for each bank and institution that is deemed systemically important.
The purpose of MREL is to ensure there are sufficient own funds and liabilities that can be written down or converted into equity if a bank or institution is in crisis. This allows the central government to take quick action and maintain the critical functions of the bank or institution without using taxpayers’ money. The requirement also helps clarify which lenders are to bear the primary costs for crisis management.
In November 2019, the Debt Office began publishing the compliance with MREL requirements by each institution.