Publication of Discussion Paper on a review of the Bank’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL) and changes to the MREL and resolvability deadlines for mid-tier firms
oday the Bank of England published a Discussion Paper (DP) that is the first part of its review of the Bank’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL).
The DP opens a broad dialogue with stakeholders, including the UK’s financial services industry, around the lessons which have been learnt for MREL policy since the publication of the Bank’s MREL Statement of Policy in 2016. Given the experience of mid-tier banks (as defined in the DP) of issuing MREL-eligible instruments, the focus of the DP is on these banks.
To enable the Bank to engage with interested parties on the issues set out in the DP and to complete its review of the MREL framework in 2021 in light of that engagement, the Bank has announced changes to the MREL and resolvability deadlines for mid-tier banks. The Bank has extended the deadline for mid-tier banks to comply with their end-state MRELs to 1 January 2023, unless they are already subject to a later deadline. Also, the deadline for mid-tier banks to implement five Statements of Policy related to the Resolvability Assessment Framework (RAF) has been extended from 1 January 2022 to 1 January 2023.
Background
1. The Bank of England, as the UK resolution authority, is responsible for taking action to manage the failure of certain financial institutions – including UK-headquartered banking groups and UK-incorporated banks and building societies (together, banks) – a process known as ‘resolution’. Resolution allows the shareholders and unsecured creditors of failed banks to be fully exposed to losses, while ensuring the critical functions of the bank can continue. Resolution reduces the risks to depositors, the financial system, and public funds that could arise due to the failure of a bank.
2. The minimum requirement for own funds and eligible liabilities (MREL) is a minimum requirement for banks to maintain equity and eligible debt so that they can be ‘bailed in’ should a bank fail. The purpose of MREL is to help ensure that when banks fail the resolution authority can use these financial resources to absorb losses and recapitalise the continuing business.
As a result, MREL is a critical element of an effective resolution regime.
3. The Bank reaffirmed in June 2018 that it would review the calibration of MREL and the final compliance date, prior to setting end-state MRELs, having particular regard to any intervening changes in the UK regulatory framework as well as banks’ experience in issuing liabilities to meet their interim MRELs. Having completed an initial analysis of banks’ access to the market for MREL instruments, the Bank has decided to issue this Discussion Paper as the first part of the MREL Review.
4. The Bank of England’s Resolvability Assessment Framework (RAF) is designed to make resolution more transparent, better understood, and more successful. It builds on the work done since the financial crisis, ensuring that firms are, and are able to demonstrate that they are, resolvable. It sets out how the Bank, as resolution authority, will assess resolvability, building on work that both firms and the Bank have already done.
