What it is
A subordination requirement determines how much of an institution's minimum requirement for own funds and eligible liabilities (MREL) must be met with subordinated instruments, rather than with liabilities ranking pari passu with operating or excluded liabilities. The aim is to reduce the risk that bailing in senior instruments would breach the no-creditor-worse-off safeguard, and to give the resolution authority confidence that loss-absorbing capacity can be used without triggering compensation claims.
Subordination can be achieved contractually, structurally (by issuing from a resolution entity such as a holding company), or statutorily (through a dedicated ranking such as senior non-preferred). Instruments counting towards the subordinated part generally rank below the excluded liabilities listed in the bail-in framework, including covered deposits, short-term interbank funding and certain operational liabilities.
How it works
For global systemically important institutions and other large banks, a minimum level of subordination is set by reference to risk-weighted and leverage exposure measures, drawing on the TLAC standard embedded in EU law. Resolution authorities may also require additional subordination on a case-by-case basis where they judge that resolution of a given entity could otherwise expose senior creditors to losses greater than they would bear in insolvency.
The requirement interacts closely with the creditor hierarchy. Because senior preferred debt sits alongside many excluded liabilities in ranking, meeting MREL with senior preferred alone can raise no-creditor-worse-off risk. Senior non-preferred debt, subordinated Tier 2 and own funds address this by sitting below senior preferred, so they can absorb losses before senior operating liabilities are reached.
Legal basis
The subordination framework is set out in the MREL provisions of the BRRD and the SRMR, which distinguish the overall requirement from the part that must be subordinated. These build on the eligibility conditions for own funds and eligible liabilities in the CRR and on the TLAC minimum for global systemically important institutions. Resolution authorities apply the requirement through the resolution planning cycle.
Relevance for banks and investors
For banks, the subordination requirement shapes issuance strategy: it drives the volume of senior non-preferred and holding-company senior debt they bring to market, and influences where in the group liabilities are issued. Failure to meet the requirement can restrict distributions through the MREL-related maximum distributable amount mechanism.
For investors, the requirement clarifies loss-absorption ordering. Subordinated MREL instruments carry higher expected loss in resolution than senior preferred debt and are priced accordingly. Understanding how much of a bank's MREL stack is subordinated, and by what technique, is central to assessing relative value across the capital structure.