How it works

Eligible liabilities are the debt instruments and other liabilities that a bank may count, together with its own funds, towards its minimum requirement for own funds and eligible liabilities. To qualify, an instrument must meet a defined set of conditions designed to ensure it is genuinely available to absorb losses and recapitalise the bank in resolution.

The conditions typically require that the instrument is issued and fully paid up, is not owned or funded by the institution itself, has a remaining maturity of at least one year, is not a deposit that benefits from preference in the creditor hierarchy, and does not arise from a derivative or a preferred deposit. Instruments must not be subject to set-off or netting arrangements that would undermine their loss-absorbing capacity, and early redemption is generally subject to authority permission.

Some requirements, particularly for larger banks, additionally demand that a portion of eligible liabilities be subordinated to ordinary senior claims, which is why instruments such as senior non-preferred debt and holding-company senior debt are used to build the required capacity. Ordinary senior preferred debt can count towards MREL within limits but may not satisfy the subordination component.

The conditions for eligibility draw on both the prudential and the resolution frameworks. Article 72b of the Capital Requirements Regulation sets out the eligibility criteria for eligible liabilities instruments in the context of the TLAC minimum, while Article 45b of the BRRD specifies the liabilities that count towards MREL and the conditions they must satisfy. The wider own funds and eligible liabilities regime for global systemically important institutions is contained in Articles 92a to 92b and 72a to 72l of the CRR.

These provisions interlock: MREL is built from own funds under the CRR plus eligible liabilities meeting these conditions, and the subordination and quality requirements determine which instruments in the creditor hierarchy can be relied upon.

Practical relevance

For banks, managing the stock of eligible liabilities is a continuous funding exercise. As instruments approach one year to maturity they cease to count, so issuers must roll over eligible debt to maintain their MREL and TLAC positions, and treasury teams monitor the eligible amount closely.

For investors, eligibility is a direct signal of risk: an instrument that counts towards MREL is, by design, exposed to write-down or conversion in resolution. Analysts distinguish carefully between eligible and non-eligible instruments, and between subordinated and senior preferred eligible liabilities, because position in the hierarchy determines the order and likelihood of loss. The one-year residual maturity cut-off and any call features also affect how the market prices these instruments.