Overlaps between the MREL and macroprudential capital buffers: a dynamic insight through stress tests

Abstract

AbstractThe article studies the impacts of the minimum requirement for own funds and eligible liabilities (MREL) on the usability of macroprudential capital buffers and any capital surplus for absorbing losses and lending to the economy through the solvency stress test of the Czech banking sector. The introduction of the MREL makes it more difficult to assess the resilience of the banking sector, especially during long adverse economic episodes in banks that use internal models to manage credit risk. The results indicate that under these circumstances, there is, i) a decrease in the usability of capital buffers, ii) a relatively early trigger of the new maximum distributable amount related to the MREL (M-MDA) regime, potentially associated with a new form of stigma effect, iii) and there may be MREL non-compliance. All these findings should be (i) incorporated into the solvency stress testing framework and published regularly, (ii) taken into account by the competent authorities (microprudential, macroprudential, resolution) to limit capital buffer overlaps and increase the distance to breaching the M-MDA.