The Bank of England (BoE) has published a statement of policy and a response to its earlier consultation on central bank’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL).
The BoE will set MREL for individual institutions by reference to three broad resolution strategies:
- modified insolvency process – for small institutions, which the BoE assesses do not provide services of a scale considered critical and for which it is considered that a pay-out by the Financial Services Compensation Scheme (FSCS) of covered depositors would meet the BoE’s resolution objectives. These institutions will have MREL set at the same level as regulatory capital requirements and so will meet their MREL simply by meeting their existing regulatory capital requirements;
- partial transfer – where institutions are considered to be too large for a modified insolvency process but where there is a realistic prospect that critical parts of the business could be transferred to a purchaser, MREL will be set at a level which permits such a transfer to take place; and
- bail-in – the largest and most complex institutions will be required to maintain sufficient MREL resources to absorb losses and, in the event of their failure, be recapitalised so that they continue to meet the PRA’s conditions for authorisation. Bail-in is designed to stabilise the institution, providing time to enable it to be restructured in order to address the underlying causes of its failure. The aim is that the institution, or its successor, is able to operate without public support.
The PRA has also published:
- Policy Statement 30/16: The minimum requirement for own funds and eligible liabilities – buffers and Threshold Conditions (PS30/16); and
- Supervisory Statement 16/16: The minimum requirement for own funds and eligible liabilities – buffers and Threshold Conditions (SS16/16). In SS16/16 the PRA sets out its expectations on the relationship between MREL and both capital and leverage ratio buffers, as well as the implications that a breach of MREL would have for the regulator’s consideration of whether a firm is failing, or likely to fail, to satisfy the Threshold Conditions.
The PRA have made two amendments to SS16/16 when compared to the draft Supervisory Statement which it consulted on in Consultation Paper 44/15: The minimum requirement for own funds and eligible liabilities – buffers and Threshold Conditions. The amendments concern the entry into force of the proposed policies and the relationship between the MREL buffer policy and restrictions on distributions.
View New Bank of England rules bring UK closer to ending taxpayer bailouts, 8 November 2016