UK Bank of England Finalizes MREL Requirements

The Bank of England published the final rules on implementing the EU Minimum Requirement for own funds and Eligible Liabilities (MREL). This is the equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. Under the Bank Recovery and Resolution Directive 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 Regulatory Technical Standards. 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 MREL.

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 Financial Stability Board'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.

View the BoE's Statement of Policy.