What the concept describes
Gone-concern loss absorption is the loss-absorbing and recapitalisation capacity that is called upon once a bank has ceased to be viable, to allow it to be resolved rather than liquidated in a disorderly way. It is the counterpart to going-concern loss absorption: where going-concern capital keeps an operating bank solvent, gone-concern capacity is what remains available to bear losses and rebuild capital after the firm has been determined failing or likely to fail.
The mechanism is the bail-in of the bank's own funds and eligible liabilities. In resolution, losses are first imposed on shareholders and existing capital instruments, and then on a defined layer of unsecured liabilities, through the write-down and conversion powers. This converts creditors' claims into equity or writes them down, absorbing losses and recapitalising the firm without recourse to public funds. The capacity that must be pre-positioned for this purpose is set through the minimum requirement for own funds and eligible liabilities in the European framework, and through the total loss-absorbing capacity standard for global systemically important institutions.
How it works in practice
MREL and TLAC exist precisely to guarantee that enough gone-concern capacity is in place before a failure occurs. Both require banks to hold, in addition to going-concern own funds, a quantum of subordinated or otherwise bail-inable liabilities that can be written down or converted in resolution. Because these instruments only absorb loss once the firm has failed, they are the archetypal gone-concern layer: senior non-preferred notes and holding-company senior debt are issued for this role, sitting above ordinary senior claims in the loss-absorbing stack but junior to operating liabilities.
The dividing line between the two concepts is the point of non-viability. Up to that point, going-concern capital works; at and beyond it, the write-down and conversion powers activate and gone-concern capacity is deployed.
Legal basis
Gone-concern capacity is given effect through the MREL provisions of the BRRD, Articles 45 to 45m, and, within the banking union, the SRMR, Articles 12 to 12k. For global systemically important institutions the parallel TLAC requirement sits in the CRR, Articles 92a and 92b. The write-down and conversion of capital instruments, and the bail-in tool that deploys this capacity, are set out in the BRRD, Articles 43 to 44 and 59 to 62.
Practical relevance for banks and investors
For banks, meeting MREL means issuing and maintaining a stock of gone-concern instruments at the right entity and seniority, so that resolution can proceed without taxpayer support. For investors, holding gone-concern instruments means accepting exposure to loss specifically at the point of failure: these bonds price the probability of resolution and the depth of bail-in, which is a different risk from the ongoing solvency risk borne by going-concern capital.