Discussion paper on resolution strategies and MREL for small and medium-sized banks

The Danish FSA publishes today a discussion paper on the preliminary considerations regarding principles for resolution and setting the minimum requirement for own funds and eligible liabilities (MREL) for small and medium-sized banks. Finansiel Stabilitet has been consulted and has contributed to the discussion paper during its preparation.



Jesper Berg
By PA Kirsten Grandahl

+45 33 55 82 10

The authorities and bankers’ associations share a common understanding that resolution plans should also reduce the risk of losses for simple creditors in the event of a resolution. This objective is not stated directly in the regulation, but is also in line with the political agreement on Bank Package IV, and the related agreement with the industry, in which it was recognised that the industry and the Danish state were jointly responsible for seeking to avoid unnecessary resolution of banks through Bank Package III, which would result in losses for simple creditors.


The objective requires that the MREL is sufficiently high to ensure that losses, as a general rule, are borne by holders of equity and subordinated liabilities.


The Danish FSA expects to approve resolution plans and set individual MRELs for banks before the end of 2017.


Possible model for resolution plans and the MREL

The discussion paper contains a description of a possible model for an orderly winding-up, in which as many activities as possible are sold, while the remaining activities are continued for a period in a bank owned by Finansiel Stabilitet. The MREL for small and medium-sized banks will therefore be set at a higher amount than the existing regulatory capital requirements, but lower than the MREL for systemically important financial institutions (SIFIs).


The model entails that the MREL is composed of two elements, which should be complied with in addition to the existing capital requirements. One is an amount to absorb the loss that is expected to arise from a more conservative valuation made by an independent valuer in the resolution situation. The other amount should be held in order to capitalise the part of the institution that cannot be sold immediately in the resolution situation. As for SIFIs, there is likely to be a requirement that the MREL be met with convertible instruments (“contractual bail-in”). This is to protect simple creditors.


The current regulations on actions regarding non-compliance with the solvency requirement and MREL involve a high degree of discretion with respect to transferring control of the bank to Finansiel Stabilitet. It follows from the explanatory notes to the Danish regulations regarding MREL that, as a general rule, any non-compliance with the MREL is considered a gross violation of the regulations. The ultimate sanction on gross and repeated cases of non-compliance is that the authorisation will be withdrawn. In practice, this means that control of the institution is transferred to Finansiel Stabilitet.


In principle, a bank can be non-compliant with MREL of an amount less than the capital buffers without transferring the control of the bank to Finansiel Stabilitet. In this situation, the Danish FSA has several reaction options. For example, as a first action, the Danish FSA is likely to order that the institution restores its capital.


However, the model, and the objective of protecting simple creditors, entail that the Danish FSA’s scope of action is severely limited once the capital buffers are deemed to have been exhausted. In the opinion of the Danish FSA, it must be assumed that the time limit for complying with the MREL in this situation will be very short in by far the majority of cases.


Phase-in period

The Danish FSA has assessed that almost one-half of Danish small and medium-sized banks would already be able to comply with the draft future MREL, if it were introduced today. By far the majority of banks are expected to be able to capitalise themselves adequately through future earnings and withholding of dividends.



The Danish FSA has included a number of questions in its discussion paper. The Danish FSA requests that any responses to these questions be submitted by no later than 28 February 2017.


Background information:

Work on resolution plans and the MREL is part of Danish implementation of the EU Bank Recovery and Resolution Directive (BRRD). The Danish FSA approves resolution plans for individual banks following recommendations from Finansiel Stabilitet and sets individual MRELs after consultation with Finansiel Stabilitet.


Finansiel Stabilitet is a public limited company owned by the Danish State working to wind up the activities taken over from distressed banks as quickly as possible.

Read the discussion paper here.


More information on the Danish bank packages can be found on Finansiel Stabilitets web site www.finansielstabilitet.dk