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Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8 percent. However, in order to an effective resolution the bank muss hold not only to its capital, but also eligible liabilities, which together with minimum capital requirements are known as MREL. However, it is not very clear what defines eligible liabilities. Bank Recovery and Resolution Directive provided by European banking authority defines EL as: (a) the instrument is issued and fully paid up; (b) the liability is not owed to, secured by or guaranteed by the institution itself; (c) the purchase of the instrument was not funded directly or indirectly by the institution; (d) the liability has a remaining maturity of at least one year; (e) the liability does not arise from a derivative.

https://eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/2930

Can anyone provide a broader comment/explanation on a-e?

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    $\begingroup$ Theoretically capital is capital and debt is debt, but as a concession to banks, regulators decided that certain subordinated liabilities (low grade debt) can be included in MREL. And this "debt that counts as capital" (!!!) (i.e. liabilities that can be included in MREL) is given the name "eligible liabilities". If you ask me, it is a terrible idea, that will require very complex rules to decide what is eligible and what isn't. I believe more clarity about 'eligible liabilities' will be coming out in 2021. $\endgroup$
    – nbbo2
    Nov 3, 2020 at 13:03
  • $\begingroup$ Thank you. What do you have in mind referring to subordinated liabilities/low grade debt? $\endgroup$
    – R_quester
    Nov 4, 2020 at 8:35
  • $\begingroup$ For example you might look at "contingent convertible bonds" a new kind of instrument that can "absorb losses" (i.e. be defaulted on) if the bank gets in trouble. So they are hybrid: like bonds in normal times but like equity in a crisis bis.org/publ/qtrpdf/r_qt1309f.pdf' There will probably be many strange instruments like this, designed to be neither fish nor fowl. $\endgroup$
    – nbbo2
    Nov 4, 2020 at 10:45
  • $\begingroup$ Thanks for a comprehensive reply! $\endgroup$
    – R_quester
    Nov 4, 2020 at 16:26

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