MREL in European banks: Requirement and shortfall under BRRD II

Summary

Under BRRD 2, European banks’ MREL deficit is €112bn (63% attributable to O-SIIs and non-systemic banks) and €188bn lower than 2018 results, mostly explained by issuances of €194bn during 2018–2019. Erosion of profitability is now critical, with interest expense increasing 2.3-3.2%. Basel IV significantly increase needs.

Key points

• Key points:
• MREL deficit, breakdown by country: In absolute terms, the overall deficit is €112bn for the total sample, and the greatest deficits would be observed in France (€48bn), Italy (€13bn), Sweden (€12bn) and Spain (€11bn). In percentage points of consolidated assets, European banks need to issue 0.4% of total assets on average (1.2% of RWA).
• MREL deficit, breakdown by systemic importance: The requirement for O-SIIs is 13bps of assets (47bps of risk weighted assets) above G-SIIs, which is mainly caused by a higher P2R.
• MREL deficit, breakdown by BRRD II classification: “Risky” banks would have a greater requirement than “no risky” banks and a greater MREL deficit. The difference in MREL deficit between “risky” and “no risky” banks is 496bps.
• The interactions of Basel IV and MREL: Under Basel IV, G-SIIs would be the most impacted and would require the biggest additional amount (€45bn), followed by O-SIIs (€38bn) and non-systemic banks (€9bn). However, in bps of RWA, non-systemic banks would have larger additional needs than O-SIIs and G-SIIs.
• Impact on interest expense: According to our calculations, the interest expense would increase in a range between 2.25% and 3.16%

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