Luxembourg’s banking sector has remained resilient, with no shortfalls reported in the latest minimum requirement for own funds and eligible liabilities (MREL) update, the European Banking Authority (EBA) last week. The five Luxembourg-based banks assessed during the first half of 2024 were Banque Internationale à Luxembourg, Banque Raiffeisen, Brown Brothers Harriman (Luxembourg) SCA, Northern Trust Global Services SE and Spuerkeess.
According to the quarterly dashboard, the majority of banks across the European Union have successfully met their MREL targets ahead of the January 2024 deadline. However, 21 EU banks are still in their transition period and report shortfalls.
As of 30 June 2024, 318 banks out of a sample of 339 met their MREL targets. This represents a significant improvement compared to the previous year, when 30 banks reported shortfalls at the end of 2023. The 21 banks still in transition collectively faced an outstanding shortfall of €6.1bn or 2.6% of their combined risk-weighted assets (RWAs). These banks are expected to address these shortfalls as they move towards full compliance.
Looking ahead, the total volume of MREL instruments that will become ineligible by the end of June 2025 is €220bn. These instruments will lose their eligibility as their residual maturity falls below one year. Although this accounts for 18.6% of the MREL eligible instruments in the sample, the EBA has assessed the impact as manageable. These ineligible instruments mainly affect smaller banks, while larger institutions tend to rely more heavily on bail-in strategies, which remain the preferred option for institutions with higher RWAs.
In terms of resolution strategies, the dashboard highlights a continued preference for transfer strategies, which accounted for 61% of the number of decisions made. However, bail-in remains the preferred strategy when considering RWAs covered, representing 94% of the total. The EBA noted that smaller banks generally favour transfer strategies, while larger institutions tend to opt for bail-in strategies, reflecting the differing needs and resolution approaches based on size and complexity.
MREL is designed to ensure that EU banks have sufficient loss-absorbing capacity to execute the preferred resolution strategy in the event of a bank failure. This requirement is in line with the bank recovery and resolution directive (BRRD), which aims to safeguard EU financial stability by ensuring that banks can withstand financial distress without relying on taxpayer bailouts.