How it works

Internal MREL is the requirement placed on entities within a resolution group that are not themselves resolution entities. Where external MREL is issued by the resolution entity to the market to provide the group's overall loss-absorbing and recapitalisation capacity, internal MREL is downstreamed within the group: material subsidiaries issue eligible instruments that are held, directly or indirectly, by the resolution entity at the top of the group.

The mechanism is central to a single point of entry strategy. If a subsidiary experiences losses, those losses are absorbed locally by writing down or converting the internal instruments, which pushes the loss up to the resolution entity without the subsidiary itself being put into resolution. The resolution entity, in turn, has issued external MREL to third parties, so ultimate loss absorption falls on external investors while the operating subsidiary continues to function.

Internal MREL is calibrated by the resolution authority, generally as a proportion of the external MREL that would apply if the subsidiary were a resolution entity, and it can be met with own funds and eligible internal instruments that meet specific conditions, including subordination and a requirement that the resolution entity be able to control the write-down or conversion.

The requirement is set out in the Bank Recovery and Resolution Directive. Article 45f of the BRRD governs the application of MREL to institutions that are not resolution entities, setting the conditions under which internal MREL is imposed and the instruments that qualify, including the requirement that eligible liabilities be issued to and purchased by the resolution entity. The broader MREL framework sits in Articles 45 to 45m of the BRRD and, for the Banking Union, in Articles 12 to 12k of the SRMR. The revisions introduced by BRRD II refined the distinction between external and internal MREL and the treatment of intermediate entities.

Where permitted, authorities may allow internal MREL to be met partly through collateralised guarantees between the resolution entity and the subsidiary, subject to strict conditions.

Practical relevance

For banking groups, internal MREL determines how loss-absorbing capacity is distributed across legal entities and jurisdictions. Under a single point of entry approach it concentrates external issuance at the parent and downstreams capacity internally; under a multiple point of entry approach, subsidiaries that are themselves resolution entities issue their own external MREL instead.

For host authorities, internal MREL is a key safeguard: it gives comfort that a local subsidiary can be recapitalised from group resources rather than depending on local resolution. Calibration and the degree of pre-positioning are therefore sensitive points in cross-border groups, balancing the home authority's preference for flexibility against host authorities' preference for certainty.

For investors, the distinction matters because internal MREL instruments are held within the group and are not the securities they buy; the tradable instruments are external MREL. Understanding which entity in a group is the resolution entity is essential to assessing where an investor sits in the loss-absorption chain.