What are the determinants of MREL-eligible debt yields? Evidence from the EU banking sector

We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)-eligible debt yields in a sample of 63 European banking groups during the period 2009Q3-2019Q2 in 14 European countries. We conclude that MREL-eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL-eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and nonsystemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particular regarding bank and market risk variables. Our model also suggests that investors closely monitor senior non-preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non-preferred issuances. Credit ratings are seen as a highcredibility tool, helping investors in the market to better exercise market discipline.