Portfolio implications of MREL

The global crisis of 2008 exposed vulnerabilities in the banking sector, leading to the establishment of regulatory measures aimed at strengthening financial institutions. One such regulation is the Minimum Requirement for Own Funds and Eligible Liabilities (MREL), designed to ensure that banks maintain an adequate buffer to absorb losses and avoid systemic risks. This dissertation explores the necessity of issuing debt to meet MREL requirements and investigates the feasibility of creating an investment portfolio to cover these issuances. The growing importance of MREL in enhancing financial stability and preventing taxpayer-funded bailouts is clear. However, as banks navigate the complex regulatory landscape, understanding the implications of debt issuance to meet MREL becomes crucial. Furthermore, exploring the potential creation of investment portfolios to cover these debt costs presents an innovative perspective for managing regulatory compliance. This dissertation examines strategies like the Cash Flow Matching and Mean Variance Theory (MVT) to optimize potential banks’ portfolios and manage liabilities issued due to MREL. We focus on the application of a typical issuance from Portuguese banks and on bond portfolios. For this analysis, we examine a hypothetical MREL issuance and use financial market data from twenty-five bonds to determine the optimal portfolio.