MREL is determined only after deciding “how that bank would be resolved”

MREL (Minimum Requirement for Own Funds and Eligible Liabilities) is the minimum level of “own funds plus eligible liabilities” that a bank must build up in normal times so that, when it enters resolution, loss absorption and recapitalisation can be completed on the shareholder and creditor side rather than through taxpayer support. In both the UK and the EU, the purpose of the regime is the same: to ensure that a bank can be resolved without interrupting critical functions.

However, it misses the essence to understand MREL simply as a “thicker capital requirement.” Ordinary capital regulation is a going concern framework, aimed at prudential soundness on the assumption of continued operation in normal times. MREL is a gone concern framework, aimed at ensuring that there is a source of funds that can actually be bailed in in resolution. That is why not only CET1, AT1, and Tier 2 but also certain senior debt instruments that meet specified conditions can count toward it. But not everything qualifies: eligibility depends on matters such as residual maturity, ranking, and contractual terms. The Bank of England’s MREL Statement of Policy also states that MREL eligible liabilities should, as a general rule, have a residual maturity of at least one year.

MREL is determined only after deciding “how that bank would be resolved”

The first point to grasp in understanding the regime is that MREL is not a stand-alone requirement that is set first on its own. First, the authority determines for each bank its preferred resolution strategy, that is, how it would be resolved if it failed. MREL is then set as the amount of loss-absorbing and recapitalisation capacity needed to execute that strategy. Accordingly, MREL is a number derived backwards from the resolution strategy, and the meaning of the regime cannot be fully understood by looking at the MREL level alone. The first thing to look at is which resolution strategy is envisaged for that bank.

For example, where a bail-in strategy is envisaged, the bank needs to build up a sufficient amount of externally issued MREL-eligible liabilities so that investors can bear losses at the point of failure. By contrast, under a transfer strategy, the main focus is not to rebuild the whole bank through bail-in, but to transfer the business or deposits to an acquiring bank or bridge bank, so the need to require the same volume of bail-in buffer in advance becomes relatively smaller. In other words, the amount of MREL required is not determined automatically by the size of the bank alone; it varies depending on which resolution strategy is to be used.

The UK threshold revision is not a “uniform relaxation” but a review of which strategy is assumed

The UK’s July 2025 revision to MREL policy raised the previous £15bn / £25bn thresholds to £25bn / £40bn. Looking only at that, it is easy to see it as a blanket easing of MREL for mid-sized banks. More accurately, however, it should be understood as a revision of how resolution strategies are mapped to banks according to their size.

Put simply, for banks with total assets below £25bn, modified insolvency, in other words an insolvency-based approach, will normally be assumed, so the idea of broadly requiring additional MREL is less likely to arise. Banks between £25bn and £40bn fall into an intermediate zone, in which it is assessed case by case whether transfer or bail-in is the appropriate strategy. For banks above £40bn, a resolution strategy based generally on bail-in is more likely to be assumed, and as a result full MREL becomes necessary. Therefore, the essence of this revision is not that “mid-sized banks were uniformly excluded,” but that “the assumed resolution strategy was rearranged according to bank size, and the required level of MREL was changed in line with that strategy.”

This is easier to see when looking at the treatment of transfer strategy. For banks for which transfer is envisaged, after the revision MREL is intended to be set at the same level as minimum capital requirements (MCR). This does not mean that MREL has been reduced to zero; it means that such banks are not required to hold the thick full bail-in buffer. The requirement has simply been recalibrated to a level consistent with the relevant resolution strategy, and it is not accurate to read it merely as “deregulation.”

Who determines MREL — the supervisory authority and the resolution authority are not the same

Another important point is that the body that determines MREL is not the supervisory authority but the resolution authority. If this is left vague, prudential regulation and resolution regulation become mixed together.

In the EU Banking Union, MREL is set by the SRB (Single Resolution Board). The ECB, as supervisory authority, determines matters such as Pillar 2 requirements through SREP, but it is not the body that decides MREL itself. The ECB and the SRB share information and coordinate, but their roles are separate. In the UK, the Bank of England sets MREL in its capacity as the resolution authority.

This distinction matters in practice because supervisory capital requirements and buffers for resolution operate on different logic. A Pillar 2 requirement is a prudential requirement, intended to ensure that a bank is run soundly in normal times, and it is determined under the authority of the supervisory body. MREL, by contrast, is a gone concern requirement, intended to make loss absorption and recapitalisation possible even after the bank has entered resolution, and it is set by the resolution authority. The two are not unrelated, but their purpose and institutional ownership are not the same.

The MREL formula — LAA plus RCA, in two limbs

In the EU/SRB context, the basic structure of MREL is the sum of the loss absorption amount (LAA) and the recapitalisation amount (RCA). LAA is the amount of losses to be absorbed up to the point of resolution, and RCA is the amount needed to recapitalise the continuing business after resolution.

This is expressed in two limbs: a TREA (Total Risk Exposure Amount, in substance equivalent to RWA) basis and an LRE (Leverage Ratio Exposure) basis.

On the TREA basis, both LAA and RCA are calibrated by reference to the sum of the supervisory Pillar 1 and Pillar 2 requirements. Conceptually, this creates a structure in which P1+P2 is held twice — the first time for loss absorption and the second time for recapitalisation. On the LRE basis, both LAA and RCA correspond to the leverage ratio requirement. The SRB may, where necessary, also add a market confidence charge (MCC) to the RCA. MCC is an additional amount intended to maintain market confidence post-resolution, and it relates to the TREA basis.

In practice, banks look at both limbs and are pulled by whichever is more binding. For banks with high risk density, the TREA basis tends to be heavier; for banks with many low-risk-weighted assets and a large balance sheet, the LRE basis tends to bite more. That is why treasury and capital teams need to manage MREL not as a single “MREL %” but through both a risk-based constraint and a leverage-based constraint.

External MREL and internal MREL — which company issues what, and to whom

MREL is not a regime that merely says, “increase long-term funding at group level.” What matters is that it specifies “which company,” “to whom,” and “in what form of liability.” Accordingly, this is less a matter of long-term stable funding in the ALM sense than a regime for designing in advance where losses will be absorbed and where recapitalisation will take place in resolution.

External MREL

External MREL is set for the company at the centre of resolution, namely the resolution entity. What is required is that the resolution entity itself has loss-absorbing capacity through eligible liabilities and own funds that it has issued to external investors. Put differently, the external MREL of the resolution entity is not satisfied merely because it has borrowed long-term from an upstream parent company or another group company. It must sit on that entity in a form held by external investors and capable of being bailed in when needed.

In a typical SPE group, the HoldCo issues MREL-eligible liabilities to external investors, and this forms the core of the external MREL. By contrast, in an MPE structure, there may be multiple resolution entities, so each sub-group will have its own external MREL structure.

Internal MREL

Internal MREL is set for important subsidiaries that are not themselves resolution entities. Typical examples are material subsidiaries and ring-fenced bank subsidiaries. In this case, the basic structure is that the subsidiary issues an internal MREL instrument within the group, and the parent company or the upstream resolution entity subscribes to it. In other words, for a subsidiary, the regime is centred not on “issuing its own long-term debt to the market,” but on “issuing loss-absorbing capacity internally to the parent company.”

Looking only at this point, internal MREL may appear to be no more than long-term intragroup funding between parent and subsidiary. In reality, however, that is not the case. What is required here is not just an ordinary intragroup loan, but an internal MREL instrument that can be written down or converted in resolution, and that has the necessary ranking and contractual terms. Accordingly, the idea that “it is sufficient because the subsidiary is funded long-term by the parent” is not accurate. What is required is an internal issuance that is legally designed so that it can function as a loss-absorbing instrument.

For this reason, even if a subsidiary has issued its own long-term debt to the market, that does not necessarily substitute for internal MREL. What matters under the regime is not simply that long liabilities exist, but where those liabilities are placed in line with the resolution strategy. In other words, the question is not “the subsidiary has issued long-term debt to the market, so that is enough,” but “is it positioned internally in a way that allows losses to be upstreamed to the parent.”

The level of internal MREL

In the UK, the approach is that internal MREL for a material subsidiary is calibrated, by reference to the external MREL that would be required if that subsidiary were itself a resolution entity, at a basic range of around 75% to 90% of that amount. Where a ring-fenced bank is at the top of a material sub-group, 90% is the starting point. In a simple UK group structure, the requirement may in practice come close to 100%.

Accordingly, internal MREL is not a vague idea that “the parent can help when needed.” It is a mechanism under which resolution planning determines in a fairly concrete and quantitative manner which subsidiaries should hold how much loss-absorbing capacity internally in advance.

iTLAC and iMREL — same function, different legal source and scope

If external TLAC/MREL is “loss-absorbing capacity issued to the market,” internal TLAC/MREL is “internal loss-absorbing capacity pre-positioned within important group subsidiaries.” Functionally, the two are almost the same, but their legal source and scope of application differ.

iTLAC is an FSB global standard, and it applies to material sub-groups of G-SIB groups. Each material sub-group must maintain internal TLAC equal to 75% to 90% of the external TLAC that would be required if it were an independent resolution group. The level is determined by the host authority in consultation with the home authority, and the denominator is calculated on the basis of the sub-consolidated balance sheet of the material sub-group. It is not simply “a percentage of the parent group’s consolidated RWA.”

iMREL belongs to the EU/BRRD framework, with the legal basis found in the internal MREL provisions of BRRD/SRMR. It is set for entities that are not resolution entities. In the EU context, internal MREL belongs to the world of Article 45f BRRD, while internal TLAC is separately organised under the CRR as a requirement for non-EU G-SII material subsidiaries.

The SRB, as the implementing authority on the EU side, sets both external MREL and internal MREL. For G-SIIs, the statutory Pillar 1 TLAC requirement under CRR Articles 92a/92b applies as a floor, and where the general MREL calibration (LAA+RCA) exceeds that floor, the SRB sets an add-on above it. In other words, for G-SIIs, TLAC is the floor and MREL sits above it where necessary. In SRB documentation, internal TLAC and internal MREL are also presented as parallel but distinct concepts, so at least in EU practice they are not perfect synonyms.

The SRB extends the scope of internal MREL to entities that perform critical functions, entities that meet the 2% threshold of the resolution group’s TREA, leverage exposure, or operating income, or entities with total assets above €5 billion. Whereas iTLAC is limited in scope to G-SIB material sub-groups, iMREL applies more broadly.

The prudential stack and the MREL stack — the line against double use

This is one of the heaviest issues in bank capital management practice.

The prudential stack consists of P1 + P2R + the combined buffer requirement (CBR). The MREL stack consists of LAA + RCA +, where applicable, MCC. The two differ in purpose and in the authority that sets them, but they raise the question of whether the same CET1 can be used twice.

The SRB is clear that CET1 cannot be used simultaneously to satisfy both MREL-TREA and the capital buffer requirement. In other words, on the TREA basis a line of “no double use” is drawn between the prudential stack and the MREL stack. By contrast, for leverage-based MREL, the constraints on the usability of the same amount of capital are treated differently.

This gives rise to the issue of M-MDA (MREL-Maximum Distributable Amount). Even where a bank satisfies its own funds requirements and sits above the CBR, and therefore is not in breach of prudential MDA, the SRB may impose M-MDA if, after taking into account external/internal MREL, the bank does not satisfy the CBR on a TREA basis. In other words, even when the prudential capital stack is being met, distributions may still be restricted on the gone concern side. This can affect dividends, AT1 coupons, and variable remuneration.

This is a very heavy issue for treasury and capital management. EBA reporting also shows that EU banks maintain management buffers not only against going concern stacks but also against gone concern stacks — especially MREL % TREA. In practice, banks manage separate MREL headroom not because the regime requires only a bare minimum, but because they want to avoid distribution restrictions and issuance timing risk.

How this translates into bank practice

Taking all this together, MREL is not simply a long-term stable funding regulation for ALM; it is liability structuring for resolution engineering. The treasury issue is not only “securing long funding,” but also “in which legal entity, with what ranking and contractual terms, and in the form of debt held by whom, should it be placed.”

The axes that ALM, treasury, and capital teams need to manage include at least the following.

First, the capital stack (P1, P2R, CBR). This is the going concern prudential requirement. Second, the MREL-TREA/subordination stack. This is the gone concern risk-based constraint. Third, MREL-LRE. This is the gone concern leverage-based constraint. On top of that, the external issuance plan, the internal downstreaming plan, M-MDA headroom, and the call/refinancing profile must all be managed in an integrated way.

Once these three are viewed separately, capital headroom and MREL headroom must also be managed separately in light of the prohibition on double use of CET1. If one looks only at whether P1/P2R/CBR are being met, one may miss the risk of being caught by M-MDA on the resolution stack side. Conversely, even if one follows only the MREL numbers, the risk of a CBR breach on the prudential stack side remains separately.

To understand MREL properly, it is better to see it not as an extension of capital regulation, but as part of a regime philosophy that says: banks must not only be structured so that they do not fail, but must also have a capital structure prepared in advance so that, even if they do fail, they do not stop. External MREL is the outward-facing buffer that allows losses to be imposed on investors; internal MREL is the internal wiring that allows important group subsidiaries to survive without being allowed to die. Designing those together in an integrated way is the practical meaning of MREL as resolution engineering.