Banks in three European countries face debt “challenges”, warns the bloc’s regulator

After taxpayers had to bail out undercapitalized lenders in the global financial crisis more than a decade ago, banks have had to issue “minimum requirements of own resources and eligible liabilities”, known as MREL by its acronym in English.

Each bank has a target to meet by January 2024, which most have already achieved.

The European Banking Authority (EBA) said that, in December 2021, 70 of a sample of 245 banks across the bloc had a combined deficit of 33 billion euros ($35.75 billion), 42% less than a year earlier.

However, since December 2021, the cost of issuing MRELs has risen sharply as central banks have raised borrowing costs to counter high inflation.

This forces banks to offer even higher interest rates to MREL buyers in exchange for their agreeing to write down debt to replenish capital buffers if necessary.

For the first time, the annual report examines the impact of the MREL on the profitability of the banking sector, concluding that it is “manageable” overall.

“However, the costs are well above the average for certain groups of banks and certain jurisdictions, which can pose problems,” says the EBA in its report, in which it singles out Italy, Portugal and Greece without naming the individual lenders.

Many of the banks facing these challenges do so because of broader profitability concerns, rather than higher interest rates that make MREL more expensive, the EBA added.

Since the end of 2021, only 23 of the 70 banks facing a shortfall had failed to increase their MREL stock during the first half of 2022, with the number falling further in the second half of the year.

“Our report shows that the MREL is not the main determinant of profitability for most banks, and we expect most of them to meet the requirement by January 2024”said Thibault Godbillon, an EBA policy expert.