Qualitative Capital Requirements and their Relationship with MREL/TLAC

Abstract This chapter investigates the relationship of qualitative capital requirements with total loss absorbing capacity (TLAC)/minimum requirement for own funds and eligible liabilities (MREL). The resulting rather complex, multi-layered structure established under Basel III and further refined under the Basel III Accord’s finalization (commonly referred to as ‘Basel IV’) reflects proportionality considerations and seeks to accommodate banks’ desire to retain sufficient leeway to choose from a mix of capital and (hybrid) debt instruments to fulfil regulatory capital requirements. The chapter begins with a critical review of the functional rationale that underpins capital-reliant banking regulation, which serves as the focal point for a normatively guided interpretation of the regulatory framework. It then identifies the key determinants for the actual loss-absorbing capacity of institutions’ CET1, AT1, and T2 capital, as well as their TLAC/MREL items. Finally, the chapter looks into issues regarding the relationship between the multiple layers of regulatory capital such as the stacking order of capital requirements and the restrictions on double-gearing of capital.