On November 8, 2016, the Bank of England published the final
rules on implementing EU MREL. This is the equivalent of the US
TLAC rule. Under the BRRD and related UK legislation, the BoE is
responsible for directing relevant firms to maintain MREL. MREL is
a minimum requirement for firms to maintain equity and eligible
debt liabilities that can bear losses before and in resolution and
results in a top up to standard regulatory capital requirements,
similar in concept to the old Tier 3 requirements under Basel II.
The requirement will apply to UK authorized banks, building
societies and PRA-designated investment firms, parent undertakings
of those firms that are financial holding companies and to UK
authorized subsidiaries of such firms.
The BoE published its feedback to the responses it received to
its consultation on MREL and a final Statement of Policy. The BoE
is retaining its general approach to setting MREL with a few
amendments to take feedback into account. The BoE will set MREL on
a firm-by-firm basis based on the resolution strategy allotted to
firms. The three resolution strategies are modified insolvency,
partial transfer and bail-in. The indicative thresholds for firms
that will be allocated a modified insolvency strategy have changed
from 40,000 transactional accounts to a range between 40,000 and
80,000 transactional accounts. The BoE has also clarified the
definition of transactional account by reference to the frequency
of their use. The thresholds for the other strategies remain
unchanged: £15-25 billion assets remains the threshold for
the bail-in strategy. For the partial transfer strategy, the BoE
will consider whether there are real prospects of the critical
economic functions being transferred to a purchaser. Global
Systemically Important Banks and Domestic Systemically Important
Banks will be bail-in firms.
The BoE has extended the transitional period to meet final MREL
by two years to January 1, 2022 on the basis that the 48-month
transition deadline was removed from the MREL RTS. This means that
G-SIBs with UK-incorporated resolution entities must meet an
interim MREL of 16% of risk-weighted assets or 6% of leverage
exposures (as per the TLAC standard) from January 1, 2019. G-SIBs
and D-SIBs with UK-incorporated resolution entities must meet an
interim MREL, from January 1, 2020, equivalent to the higher of two
times their Pillar 1 requirements and their Pillar 2A capital
requirement or two times the applicable leverage ratio requirement.
Partial transfer firms must meet an interim MREL of 18% of RWAs by
January 1, 2020. For modified insolvency firms, this means that the
BoE will set consolidated MREL at no higher than a firm's
current regulatory minimum capital requirements, with a final
conformance date of January 1, 2022. Interim MRELs will be
communicated to firms by the end of 2016. Firms will be asked to
submit a plan of how they intend to phase in their market issuance
to reach their interim MREL.
Final MRELs are still subject to review but the BoE's
current end-state MREL (applicable from January 1, 2022) would
require: (i) partial transfer firms, other bail-in firms and D-SIBs
to meet an MREL equivalent to the higher of two times the sum of
Pillar 1 or Pillar 2A or two times the applicable leverage ratio
requirements; and (ii) G-SIBs to meet an MREL equivalent to the
higher of two times the sum of Pillar 1 or Pillar 2A or the higher
of two times the applicable leverage ratio requirements or 6.75% of
leverage exposures. Capital buffers must be met in addition to
The BoE is also maintaining its approach to MREL eligibility
criteria, although it has provided some additional clarifications
in response to feedback. The BoE will still require structural
subordination for bail-in firms, except for building societies to
which contractual subordination will apply. In addition, eligible
liabilities must be subject to the governing law of the
jurisdiction in which the issuing entity is incorporated or include
a recognition of bail-in clause.
The BoE will continue to develop its approach to other aspects
of MREL such as reporting, disclosure, treatment of MREL holdings
and internal MREL. Its approach to internal MREL will take into
account the FSB's proposed guidance on internal TLAC which is
due to be consulted on later this year. The BoE's MREL
requirements should be read in conjunction with the PRA's
approach to setting regulatory buffers in view of MREL.
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