Policy Brief “TLAC/MREL: Making failure possible?”

01 March 2016

Policy brief

This note provides an update on recent developments in the area of bank recovery and resolution. It contains a brief primer of the current European Union (EU) bank resolution regime, in particular the “bail-in” tool, and an introduction to the recently published capital standards, TLAC and MREL.

“Bail-in”, previously known as “haircut”, and generally associated with smokefilled rooms on crisis-era weekends, has now finally joined polite society. It forms the backbone of TLAC and MREL, the new capital standards for banks currently being introduced in the European Union. Governments and regulators alike are putting their faith in this as-yet-untested instrument, in spite of its technical complexity and known risks. It does not solve the problems of thin capitalisation and contagion risk that have bedevilled the industry for the last decade. What appealed to the banking industry as a “quick fix” at the lowest cost, and to regulators as the lowest common denominator, may be found wanting in the moment of need. It appears that yet another opportunity to properly recapitalise the banking industry and to initiate profound structural reforms is being wasted. How many more of these opportunities will we get?