Based on the resolution plan for the institution, including the selected resolution strategy, the Resolution Authority takes a decision on each institution’s MREL. MREL entail that the institution must have enough capital to ensure that it can be recapitalised, or that debt can be written down debt or converted to equity, if the institution should fail. Institutions that do not satisfy the conditions for resolution are placed in conventional winding-up proceedings pursuant to the Act on Financial Undertakings and will only be required to satisfy general capital requirements for financial institutions.
MREL are therefore intended to ensure that it instead of bailing a failed financial institution out using Government funds, it will be possible to bail in and recapitalise it using creditors’ funds. MREL also have another objective: to ensure that the institution has adequate loss absorption capacity.
There is no single answer to the question of what the MREL should be for financial institutions in Iceland. There are several formulae for the calibration of MREL, and countries within the EEA have come to different conclusions on appropriate MREL for each country. This is because the legislation has a certain amount of built-in flexibility, owing to the fact that the MREL is supposed to be based on the activities of the financial institution concerned and the measures to be taken under the resolution plan. The eligible liabilities mentioned are only part of a financial institution’s liabilities; i.e., they are the liabilities that satisfy two main conditions: i) they include only financial instruments that do not comprise the capital base as provided for in the Act on Financial Undertakings; and ii) they are not exempted from bail-in, or the Resolution Authority has not expressly exempted them from bail-in according to the relevant provisions of the Resolution Act.
In addition to these main conditions, eligible liabilities must satisfy certain conditions for inclusion in MREL. This entails that they must be issued and fully paid up, and they may not be owed to, secured by, or guaranteed by the institution itself. Furthermore, they must not be funded directly or indirectly by the institution itself. The remaining maturity must be at least one year. Moreover, such liabilities may not arise from derivatives or from guaranteed or guarantee-eligible deposits of microfirms or small and medium-sized enterprises.
More information on the MREL-requirements for Financial undertakings in Iceland can be found in the Central Bank‘s MREL Policy.