Benchmarking model quantifies MREL debt issuance costs for banks
A Banco de España Occasional Paper develops a benchmarking framework to assess the cost of issuing MREL-eligible debt. The model quantifies how bank characteristics, macroeconomic conditions, and instrument features affect these issuance costs, using data from 12,075 securities across 206 banking union banks.
Size, ratings, and OIS drive issuance costs
The benchmarking model reveals significant cost advantages for larger, systemically important banks.
Global systemically important institutions (G-SIIs) benefit from 92 basis points lower issuance costs compared to banks with assets below €100 billion, while other systemically important institutions (O-SIIs) and top-tier banks see an 88 basis point reduction.
Higher credit ratings are associated with up to an 86 basis point reduction in issuance spreads.
The overnight index swap (OIS) rate is identified as the most influential macroeconomic factor, with each percentage point increase in the OIS rate linked to a 97 basis point rise in costs.
Longer maturities and greater subordination of instruments also significantly increase funding costs for banks.
MREL framework and model's data foundation
The Minimum Requirement for own funds and Eligible Liabilities (MREL) framework, introduced by the BRRD, aims to ensure banks can absorb losses and recapitalize in case of failure, reducing reliance on public funds.
This paper analyzes debt issuances by European banks from 2019Q3 to 2024Q3, a period crucial for MREL capacity building.
The dataset comprises 12,075 euro-denominated securities from 206 banks across 11 Banking Union jurisdictions.
The study employs Ordinary Least Squares (OLS) regressions and Heckman's two-step procedure to address potential selection bias in bond issuance decisions, accounting for bank characteristics and market conditions.
A valuable tool for MREL compliance
This benchmarking model offers a robust framework for banks and supervisors to understand and compare MREL debt issuance costs.
The detailed quantification of factors like bank size, credit ratings, and macroeconomic conditions provides actionable insights for strategic funding decisions.
While the focus is on the EU, the methodology could be adapted to other jurisdictions facing similar resolution requirements.