On 9 November 2016, we blogged that the Bank of England (BoE) published a statement of policy and a response to its earlier consultation on the central bank’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL).
The BoE has now published Consultation on a proposed updated statement of policy: Internal MREL – the BoE’s approach to setting a MREL within groups and further issues (consultation paper). The consultation paper explains the BoE’s proposals in respect of internal MREL and sets out proposed additions and amendments to the earlier MREL statement of policy. It also proposes amendments to address operational continuity requirements and the setting of external MREL for multiple point of entry groups. In addition, the consultation paper provides an update on how the BoE intends to develop its policy on requiring firms to disclose and report their MREL resources, and on restrictions on firms investing in each other’s loss-absorbing resources.
In terms of proposals, the BoE proposes:
- a transition period to meet internal MREL to be the same as for external MREL. Interim internal MRELs will apply from 1 January 2019 for material subsidiaries of global systemically important banks and from 1 January 2020 for other firms. End-state internal MRELs will apply from 1 January 2022. The BoE will communicate to firms annually their resolution strategies, the critical functions that they or their group provides and their internal MREL;
- to set internal MREL above capital requirements for ‘material subsidiaries’ of such groups, which represent at least 5% of a group’s risk-weighted assets, operating income or leverage exposures; and
- critical service providers supporting the delivery of the group’s critical function to maintain loss-absorbing capacity for operational continuity in resolution equivalent to at least 25% of the annual operating costs of providing services. This is in addition to resources meeting any internal MREL.
The BoE also expects that internal MREL for a material subsidiary will be scaled in the range of 75% to 90% of the full amount of external MREL that would apply if the subsidiary were itself a UK resolution entity. In deciding whether to set internal MREL for a material subsidiary above 75% scaling, the BoE will take into account the credibility of the resolution plan, the availability of other resources in the group that could be deployed to support the material subsidiary and the scaling of internal loss-absorbing resources applied by overseas authorities to material subsidiaries located in their jurisdiction.
In addition, instruments will need to meet certain criteria to qualify as internal MREL liabilities. These include the same criteria as external MREL eligible liabilities. In particular, internal MREL eligible liabilities must subordinate to operating liabilities. They must be issued directly or indirectly to the resolution entity and they must contain contractual provisions that enable the BoE to convert them to equity or write them down without placing the subsidiary into resolution.
The deadline for comments on the consultation paper is 2 January 2018.
View BoE consults on approach to internal MREL, 2 October 2017