The minimum requirement for own funds and eligible liabilities, usually called MREL, entails requiring financial institutions have enough capital to ensure that they can be reconstructed if they should fail. The Central Bank Resolution Authority determines each financial institution’s MREL based on its resolution plan and the preferred resolution action as laid down in the plan. Setting the MREL makes it possible to use the bail-in tool; i.e., to 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, which are written down and converted to capital – instead of bailing them out with Government funds. MREL also have another objective: to ensure that the institution has adequate loss absorption capacity.
The MREL is calculated as the sum of own funds and eligible liabilities, expressed as a percentage of the sum of own funds and total liabilities. It is 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.