Setting minimum requirements for own funds and eligible liabilities (MREL) makes it possible to use the bail-in tool; i.e., write down debt or liabilities or convert them to capital if the entity should fail. This involves bailing in – i.e., recapitalising the institution with creditors’ funds – instead of bailing them out with Government funds. MREL also have another objective: to ensure that the institution has adequate loss absorption capacity.
MREL are calculated as the sum of own funds and eligible liabilities, expressed as a percentage of the sum of own funds and total liabilities. MREL are often calculated as a proportion of the risk base; i.e., the total risk exposure amount, or TREA. Eligible liabilities are capital instruments that are not included in the capital base and are not explicitly excluded from the scope of the Resolution Authority’s bail-in tool; i.e., the write-down of debt or conversion of debt to equity.
Institutions that do not satisfy the conditions for resolution are placed in conventional winding-up proceedings pursuant to the Act on Financial Undertakings. These institutions are required only to satisfy general capital requirements for financial undertakings.
More information on the MREL-requirements for Financial undertakings in Iceland can be found in the Central Bank‘s MREL Policy.