MREL and Own Funds Reduction – Prior Permission Process Explained for Banks

ByOfficer

Last updated: March 2026

Your treasury team wants to call an AT1 instrument. The economics are clear, the replacement is lined up, and the board has signed off. But you cannot pick up the phone and announce the call tomorrow. You need MREL prior permission first. And if you miss the application deadline or submit incomplete documentation, you are looking at months of delay, a missed call date, and investor relations questions you did not want to answer.

The prior permission process for reducing own funds and eligible liabilities is one of those operational workflows that sits at the intersection of prudential supervision, resolution planning, and capital management. Get it right and it is invisible. Get it wrong and it blocks your capital actions for months. In practice, I find this is one of the processes that treasury and compliance teams underestimate until they hit the first rejection or timeline breach.

This guide covers the full prior permission framework: the legal basis, who needs it, the two permission types, the application timeline, what to include in the submission, and the latest EBA amendments that shorten the process. If you manage capital instruments or eligible liabilities at a bank, this is the operational workflow you need to understand.

Related reading: COREP Reporting Explained

Why Prior Permission Exists

The logic is simple. Own funds and MREL-eligible liabilities exist to absorb losses. If an institution could reduce those instruments freely, the loss-absorbing capacity that supervisors and resolution authorities rely on could evaporate exactly when it is needed most. The prior permission regime ensures that any reduction is assessed against the institution’s prudential and resolution requirements before it happens.

The CRR (Regulation (EU) No 575/2013) introduced this obligation for own funds instruments. CRR2 (Regulation (EU) 2019/876) extended it to eligible liabilities, bringing MREL instruments into the same permission framework. The BRRD (Directive 2014/59/EU) and the SRMR (Regulation (EU) No 806/2014) provide the resolution-side requirements that feed into the assessment.

In practical terms, the permission regime applies to every action that reduces an institution’s regulatory capital or eligible liabilities stack. You cannot call, redeem, repurchase, or reduce the nominal amount of these instruments without going through the process.

Legal Basis

CRR Articles 77, 78, and 78a

Article 77(1) of the CRR lists the actions that require prior permission from the competent authority. Point (a) covers reducing, repurchasing, or redeeming CET1 instruments. Point (b) covers reducing, distributing, or reclassifying share premium accounts related to own funds instruments. Point (c) covers calling, redeeming, repurchasing, or repaying AT1 or Tier 2 instruments before their contractual maturity date.

Article 77(2) extends the same obligation to eligible liabilities instruments, requiring prior permission from the resolution authority before any call, redemption, repayment, or repurchase.

Article 78 sets out the conditions under which the competent authority may grant permission for own funds reductions. There are two bases: (a) the instrument is replaced with own funds of equal or higher quality on terms sustainable for the institution’s income capacity; or (b) the institution demonstrates that its own funds will exceed requirements by a sufficient margin after the reduction. Article 78 also introduces the concept of “general prior permission” (GPP), allowing the competent authority to grant advance permission for a predetermined amount of reductions over a period not exceeding one year.

Article 78a mirrors Article 78 for eligible liabilities, placing the permission decision with the resolution authority instead of the competent authority. The resolution authority must consult the competent authority before granting permission. Article 78a(1) provides three bases for granting permission: (a) replacement with eligible liabilities or own funds of equal or higher quality on sustainable terms; (b) sufficient margin above requirements; or (c) where the partial or full replacement of the eligible liabilities instruments with own funds instruments is necessary to ensure compliance with the institution’s own funds requirements. This third condition covers situations where an institution needs to retire eligible liabilities debt and replace it with equity or capital instruments to shore up its own funds position.

Delegated Regulation (EU) No 241/2014

The detailed procedural rules sit in Commission Delegated Regulation (EU) No 241/2014, as amended by Delegated Regulation (EU) 2023/827. This is the RTS that the EBA developed to operationalize Articles 77, 78, and 78a. It specifies the application content, the timeline for submission, the assessment process, and the conditions for general prior permission.

Who Needs Prior Permission

Own Funds Instruments

Any institution subject to the CRR that wants to reduce, repurchase, call, or redeem a CET1, AT1, or Tier 2 instrument must obtain prior permission from its competent authority. In Luxembourg, this means the CSSF for credit institutions and the ECB (via the Joint Supervisory Team) for significant institutions under the SSM.

The requirement applies regardless of whether the reduction would cause a breach of minimum requirements. Even if you have a comfortable buffer, you still need permission. The competent authority assesses not just the current position but the forward-looking capital trajectory.

Eligible Liabilities Instruments

Since CRR2, institutions must also obtain prior permission from the resolution authority before reducing eligible liabilities instruments that count toward MREL. For institutions under the SRM, this means the Single Resolution Board (SRB). For institutions outside the SRM scope, the national resolution authority handles the assessment (in Luxembourg, the CSSF in its capacity as resolution authority, or the Commission de Surveillance du Secteur Financier under the national transposition of the BRRD).

The resolution authority must consult the competent authority before granting permission. In practice, this means the SRB and the ECB (or CSSF) need to coordinate their assessments, which adds time to the process.

Scope Considerations

One aspect that catches teams off guard: the permission requirement applies to legacy instruments that are grandfathered as MREL-eligible under the CRR transitional provisions (Article 494b(3) CRR for instruments issued before 27 June 2019 that do not meet all the new Article 72b(2) eligibility criteria). Even if the instrument was not designed as an MREL instrument, if it counts toward your requirement, you need permission to reduce it. In practice, many banks have a large stock of senior preferred liabilities that qualify under these grandfathering provisions, and each one technically falls within the scope of the permission regime.

The EBA has acknowledged that this creates a disproportionate burden for institutions with large portfolios of grandfathered instruments. However, the Level 1 text does not allow carving out these situations. The general prior permission mechanism is the EBA’s answer to managing this volume.

Two Types of Permission

Ad Hoc Prior Permission

Ad hoc permission covers a specific action on a specific instrument. You submit an application for a particular call, redemption, or repurchase, and the competent or resolution authority assesses it individually.

This is the standard path for one-off capital actions: calling an AT1 bond on its first call date, redeeming a Tier 2 instrument at maturity, or repurchasing CET1 shares. Each application is self-contained.

The application must include the information specified in Articles 29 and 30 of Delegated Regulation 241/2014: details of the instrument, the action planned, the date, the impact on the institution’s own funds or eligible liabilities, and evidence that requirements will continue to be met after the reduction. For eligible liabilities, the resolution authority also assesses the impact on MREL compliance.

General Prior Permission (GPP)

General prior permission is the more operationally flexible option. It allows the competent authority to pre-approve a predetermined amount of own funds reductions over a period of up to one year. Once granted, the institution can execute individual capital actions within the pre-approved envelope without submitting a separate application for each one.

GPP is particularly useful for market-making activities (repurchasing own shares or capital instruments as part of ongoing trading), employee share plans, and institutions with frequent small-scale capital actions. Without GPP, each individual transaction would require its own application and assessment cycle.

The GPP comes with limits. For CET1 market-making repurchases, the amount cannot exceed 3% of the relevant issuance or 10% of the excess CET1 above minimum requirements plus buffers, whichever is lower. For AT1 and Tier 2, the limit is 10% of the relevant issuance or 3% of the total outstanding AT1 or Tier 2 amount, whichever is lower. For eligible liabilities, the limit is 10% of the total outstanding eligible liabilities.

GPP can only be granted for a maximum of one year, after which it must be renewed. The renewal process is lighter than the initial application, but it still requires supervisory approval.

Liquidation Entities: Exempt from the Eligible Liabilities Permission Regime

Not every institution is subject to the full permission process for eligible liabilities. The Daisy Chain Directive (Directive (EU) 2024/1174), which amended the BRRD, carved liquidation entities out of the eligible liabilities prior permission regime entirely.

A liquidation entity is an institution for which the resolution authority has not determined a specific MREL requirement, or has set MREL at a level that does not exceed the loss absorption amount (i.e. no recapitalisation amount, meaning the resolution strategy is normal insolvency proceedings). For these institutions, Articles 77(2) and 78a of the CRR no longer apply. They do not need prior permission from the resolution authority to call, redeem, repay, or repurchase eligible liabilities instruments. No ad hoc permission, no GPP, no application at all.

This is a full exemption at Level 1, not a procedural simplification. Prior to the Daisy Chain Directive, the RTS contained Article 32h, which provided a simplified GPP for liquidation entities (proactive grant by the resolution authority, no 10% limit, automatic renewal). Directive (EU) 2024/1174 made that workaround unnecessary by removing liquidation entities from the scope of Articles 77(2) and 78a altogether. Article 32h of the RTS is consequently deleted.

The rationale is straightforward: for an institution that will be wound down through normal insolvency proceedings, the risk that a reduction of eligible liabilities compromises the resolution strategy is negligible. Requiring these banks to go through the same permission process as resolution entities created disproportionate burden for no material supervisory benefit.

One important caveat: the exemption covers only the eligible liabilities permission regime (Articles 77(2) and 78a). Liquidation entities remain subject to the own funds prior permission regime under Articles 77(1) and 78. If you are calling a Tier 2 instrument, you still need competent authority permission regardless of your resolution strategy.

Application Timeline

Current Framework (Post-2023 RTS)

Under the framework established by Delegated Regulation (EU) 2023/827, which amended the original RTS, institutions must submit their prior permission application at least four months before the planned action for ad hoc permissions and new (first-time) general prior permissions. For renewal of an existing GPP, the deadline is three months before the expiration of the current permission.

These are maximum deadlines. The competent or resolution authority can process applications faster. But the institution must plan on the basis that the authority will use the full period.

In practice, I recommend building in even more buffer. If your AT1 call date is in September and the competent authority needs four months, your complete application needs to be in their hands by early May at the latest. Factor in internal governance (board approval for the application, treasury sign-off, legal review of the submission documents) and you are starting work in March or April for a September call.

Latest EBA Amendment: Shortening the Timeline

On 19 March 2026, the EBA published final draft amending technical standards that shorten the application timeline. The key change: the four-month period for ad hoc and new general prior permissions reverts to three months.

The background is straightforward. When the EBA originally drafted the RTS, the application period was three months. Delegated Regulation 2023/827 extended it to four months to give authorities more time to assess the expanded scope (eligible liabilities were now included). The EBA committed to monitoring whether four months was actually needed.

After observing the implementation in practice, the EBA concluded that competent and resolution authorities have gained enough experience to process applications within three months. Stakeholders consistently pushed back on the four-month period as excessive. The EBA agreed.

The amendment is narrow. It changes only the timeline provisions in Articles 31 and 32g of Delegated Regulation 241/2014. No other aspects of the permission regime are modified. Once published in the Official Journal, the new three-month timeline will apply to all ad hoc and new GPP applications. The three-month period for GPP renewals remains unchanged.

For compliance and treasury teams, this is a practical improvement. One month less lead time means more flexibility in capital planning. But do not cut it close. Three months is still the minimum, and complex applications (especially those involving eligible liabilities where the SRB and competent authority must coordinate) can still take the full period.

What to Include in the Application

Ad Hoc Permission Application

Article 30 of the RTS specifies the information requirements. In practice, the application should include:

  • Identification of the instrument (ISIN, nominal amount, instrument type, tier classification)
  • The specific action planned (call, redemption, repurchase, reduction of nominal amount)
  • The date of the planned action and, where relevant, the announcement date to holders
  • The reason for the action (maturity, call option exercise, replacement, capital optimization)
  • Current own funds and eligible liabilities position, with a projection showing the position after the planned reduction
  • Evidence that the institution will continue to meet all applicable requirements (CET1, AT1, Tier 2, Total Capital, MREL, combined buffer requirement) after the reduction
  • If the institution claims replacement: details of the replacement instrument, its classification, and the timeline for issuance
  • The margin above requirements that the institution considers necessary, and evidence that this margin is maintained

For eligible liabilities reductions, the resolution authority will also assess MREL compliance. The application should include the institution’s current MREL position, the impact of the reduction, and a forward-looking MREL projection.

General Prior Permission Application

GPP applications require the same baseline information plus:

  • The total predetermined amount of reductions requested
  • The types of instruments covered (CET1, AT1, Tier 2, or eligible liabilities)
  • The period for which the permission is requested (up to one year)
  • The purpose (market-making, employee share plans, capital management)
  • The institution’s plan for monitoring usage against the pre-approved envelope

For GPP renewals, the information requirements are lighter. If the institution is requesting the same predetermined amount and the same scope, the authority already has the baseline. The renewal application focuses on confirming that circumstances have not materially changed and that the institution continues to meet requirements with sufficient margin.

The Assessment Process

Competent Authority Assessment (Own Funds)

For own funds reductions, the competent authority (ECB for significant institutions, CSSF for less significant institutions in Luxembourg) assesses whether:

  • The instrument is replaced with own funds of equal or higher quality on terms that are sustainable for the institution’s income capacity (Article 78(1)(a))
  • The institution’s own funds exceed all applicable requirements by a sufficient margin after the reduction (Article 78(1)(b))
  • The institution is not likely to require more own funds than its current level in the foreseeable future, taking into account SREP results and stress test outcomes

The “sufficient margin” concept is not defined with a hard number in the regulation. In practice, competent authorities look at the institution’s SREP requirements, Pillar 2 guidance, combined buffer requirement, and internal capital targets. If the post-reduction position is uncomfortably close to minimum requirements, expect pushback.

Resolution Authority Assessment (Eligible Liabilities)

For eligible liabilities reductions under Article 78a, the resolution authority (SRB for institutions under the SRM) must consult the competent authority and assess:

  • The impact on the institution’s MREL compliance, including subordination requirements
  • Whether the reduction would compromise the credibility or feasibility of the resolution strategy
  • The institution’s MREL surplus and forward-looking MREL trajectory

The consultation between the resolution authority and the competent authority adds complexity, and the RTS sets specific internal deadlines for the inter-authority process under Article 32i. Under the current framework, the consultation period is capped at three months from receipt of the consultation request, reduced to two months for GPP renewals. The resolution authority must communicate the proposed margin (the amount by which own funds and eligible liabilities must exceed requirements after the reduction) to the competent authority within two months, or within one month for GPP renewals. The competent authority then has three weeks (or two weeks for GPP renewals) to transmit its written agreement or state its reasons for disagreement.

Once the March 2026 amending RTS takes effect, these inter-authority deadlines will be adjusted to align with the shorter overall three-month processing period. Where the overall application timeline is shorter than four months under the amended Articles 31 and 32g, Article 32i(7) provides that the consultation and margin communication periods shall be agreed between the resolution authority and the competent authority taking into account the relevant maximum time period. In practice, expect compressed internal deadlines across the board.

This two-authority coordination is the main reason the timeline was extended to four months in 2023, and it remains a practical bottleneck even with the new three-month period. The SRB needs to verify the MREL impact, propose the necessary margin, and obtain the competent authority’s agreement, all within the overall processing window.

Conditions and Restrictions

The authority can grant permission unconditionally, grant it with conditions, or reject it. Conditions might include a cap on the reduction amount, a requirement to issue replacement instruments within a specified timeframe, or enhanced monitoring of the institution’s capital position post-reduction.

In my experience, outright rejections are rare for well-prepared applications. The more common outcome is a request for additional information, which effectively extends the timeline. This is why complete, high-quality applications matter more than speed.

Common Pitfalls and Practical Tips

Starting Too Late

The single most common problem. Teams work backward from the call date and assume the supervisory timeline is all they need. They forget about internal governance, document preparation, and the possibility of information requests from the authority. Start the internal process at least five to six months before the planned action, even with the new three-month regulatory timeline.

Incomplete Applications

An application missing the post-reduction capital projection or the MREL impact assessment will be sent back. This resets the clock. The authority’s processing period does not start until the application is complete. I have seen institutions lose two months because the initial submission lacked a forward-looking MREL waterfall.

Underestimating the Margin Requirement

The regulation requires the institution to exceed requirements by a “sufficient margin” after the reduction. Some institutions interpret this as meeting the minimum. Supervisors interpret it differently. If your post-reduction CET1 ratio sits at exactly 8.0% with an SREP requirement of 8.0%, expect questions. A margin of at least 50-100 basis points above the fully-loaded SREP requirement (including P2G) is a reasonable target for a smooth approval.

Forgetting Eligible Liabilities Scope

Teams focused on own funds sometimes forget that the permission regime now covers eligible liabilities too. If you are repaying a senior non-preferred bond that counts toward MREL, you need resolution authority permission. This catches banks that issue senior non-preferred debt for general funding purposes but have it count toward MREL by default.

GPP Renewal Timing

GPP expires after one year (or the period granted, whichever is shorter). If you let it lapse, you lose the pre-approved envelope and must apply from scratch at the initial application timeline. I recommend diarizing the renewal application at least four months before expiration to ensure continuity.

Luxembourg-Specific Considerations

In Luxembourg, the competent authority for credit institutions is the CSSF, except for significant institutions supervised directly by the ECB under the SSM. For significant institutions, the ECB Joint Supervisory Team handles the assessment, though the CSSF remains involved as the national competent authority.

For resolution authority functions, Luxembourg credit institutions that fall under the SRM have the SRB as their resolution authority. Less significant institutions outside the SRM scope have the CSSF as their national resolution authority under the Luxembourg transposition of the BRRD (the Law of 18 December 2015 on resolution of credit institutions, as amended).

In practice, Luxembourg-based banks should engage early with their CSSF or ECB contact point to discuss the planned capital action informally before submitting the formal application. This is not required by the regulation, but it significantly reduces the risk of surprises during the formal assessment. The CSSF has historically been pragmatic in its approach to prior permission, but they expect complete and well-documented applications.

Impact of the March 2026 EBA Amendment

The final draft RTS published on 19 March 2026 is a targeted amendment. Here is what changes and what does not:

What changes:

  • Ad hoc prior permission timeline: from 4 months to 3 months before the planned action
  • New (first-time) general prior permission timeline: from 4 months to 3 months

What also changes:

  • RA/CA consultation periods under Article 32i: adjusted to align with the shorter overall processing timeline
  • Article 32h (simplified GPP for liquidation entities): deleted, as these entities are now fully exempt from the eligible liabilities permission regime under the Daisy Chain Directive

What stays the same:

  • GPP renewal timeline: remains at 3 months before expiration of the existing permission
  • All information requirements (application content, supporting documentation)
  • The assessment criteria and conditions for granting permission
  • The GPP limits (3%/10% for own funds, 10% for eligible liabilities)
  • The exceptional circumstances provision allowing authorities to accept applications on shorter notice

The amendment still needs to go through the EU Commission adoption process and publication in the Official Journal before it takes effect. Banks should monitor the timeline but can start planning capital actions on the basis of the shorter period once the delegated regulation is published.

The practical takeaway: institutions that found the four-month period restrictive, particularly for managing AT1 call dates or Tier 2 maturities, get meaningful relief. One month of additional flexibility in capital planning may not sound dramatic, but for treasury teams managing multiple instruments with overlapping call dates, it translates to real operational breathing room.

Frequently Asked Questions

Does the prior permission requirement apply even if we have a large capital surplus?

Yes. The requirement to obtain prior permission is not conditional on the institution’s capital position. Even if you exceed all requirements by a wide margin, you must obtain permission before reducing own funds or eligible liabilities instruments. The surplus will make the approval process smoother, but the process itself is mandatory.

Can we submit one application covering multiple instruments?

Yes. Article 29(2) of the RTS allows the application to include a plan covering several capital instruments to be reduced over a limited period. In practice, bundling related actions into a single application is more efficient for both the institution and the authority.

What happens if the authority does not respond within the three-month (or four-month) period?

There is no automatic approval mechanism. Silence from the authority does not mean permission is granted. If the authority has not responded, the institution cannot proceed with the planned action. In practice, the authority will communicate its decision or request additional information before the deadline expires, but there is no deemed-approved provision.

Do Tier 2 instruments that are amortizing (within the final five years to maturity) still require permission?

Yes. Once an instrument has been qualified as Tier 2 eligible, it remains subject to the prior permission regime regardless of amortization status. The amortized amount is not relevant for removing the instrument from the permission scope. Any action listed in Article 77(1) still requires prior approval.

How does the GPP interact with MREL requirements?

The specifications on prior permission for reductions are equally applicable to eligible liabilities for MREL purposes. If a GPP covers instruments that count toward both own funds and MREL, the competent authority and the resolution authority both need to be satisfied. For eligible liabilities GPP, the resolution authority is the primary decision-maker, with consultation of the competent authority.

Can we use the shorter timeline from the new EBA amendment immediately?

Not yet. The final draft RTS must be adopted by the European Commission and published in the Official Journal before it takes effect. Banks should continue applying the current four-month timeline for ad hoc and new GPP applications until the amended delegated regulation is formally in force.

What qualifies as “exceptional circumstances” for a shorter application period?

Articles 31(4) and 32g(4) of the RTS allow competent authorities to permit institutions to submit applications within a shorter timeframe on a case-by-case basis and under exceptional circumstances. The regulation does not define what qualifies. In practice, genuine market urgency (such as a volatile market window for replacement issuance) or operational circumstances beyond the institution’s control may be accepted. This is not a mechanism for routine use.

Related Articles

  • COREP Reporting Explained – A practical guide to the Common Reporting framework, including own funds templates that feed directly into prior permission assessments
  • FINREP Reporting Explained – Financial reporting framework covering balance sheet and P&L data used in capital projections
  • Common COREP Reporting Errors – Frequent mistakes in own funds reporting that can complicate the prior permission process
  • EMIR Reporting Explained – Derivatives reporting requirements relevant for institutions with hedging strategies tied to capital instruments

Key Takeaways

  • Any reduction of own funds (CET1, AT1, Tier 2) or MREL-eligible liabilities requires prior supervisory permission under CRR Articles 77, 78, and 78a
  • Two permission types exist: ad hoc (single action) and general prior permission (pre-approved envelope for up to one year)
  • The current application deadline is four months for ad hoc and new GPP, three months for GPP renewals, but the EBA’s March 2026 final draft RTS will shorten ad hoc and new GPP to three months once adopted
  • Liquidation entities (MREL set at loss absorption only, or no MREL requirement determined) are fully exempt from the eligible liabilities prior permission regime under the Daisy Chain Directive (2024/1174). Own funds permission still applies
  • Eligible liabilities reductions require resolution authority (SRB) permission, with mandatory consultation of the competent authority (capped at 3 months, or 2 months for GPP renewals)
  • The permission regime applies to legacy and grandfathered instruments that count toward MREL, not just purpose-designed MREL bonds
  • Incomplete applications reset the assessment clock. Invest the time upfront to get the submission right
  • Start internal preparation at least five to six months before the planned action to account for governance, documentation, and potential information requests
  • In Luxembourg, engage with the CSSF or ECB JST informally before formal submission to reduce the risk of surprises

Sources and References

Disclaimer: The information on RegReportingDesk.com is for educational and informational purposes only. It does not constitute legal, regulatory, tax, or compliance advice. Always consult your compliance officer, legal counsel, or the relevant supervisory authority for guidance specific to your institution.

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