Shearman & Sterling LLP | FinReg | Bank of England Publishes MREL Consultation and Operational Guide to Bail-In
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  • Bank of England Publishes MREL Consultation and Operational Guide to Bail-In

    The Bank of England has published two documents on the U.K.’s bank recovery and resolution regime: a consultation on its approach to setting minimum requirements for own funds and eligible liabilities and an operational guide to the execution of bail-in in the U.K. In a statement on the publications, the BoE’s Deputy Governor for Markets and Banking explained that, while progress has been made in ensuring the resolvability of U.K. firms, there is more work to do to address resolvability risks. The consultation paper and operational guide form part of the U.K.’s maturing recovery and resolution regime.

    The consultation paper sets out proposed changes to the BoE’s MREL framework. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution. The requirement applies to all U.K. banks, building societies and certain investment firms supervised by the U.K. Prudential Regulation Authority or Financial Conduct Authority, to financial or mixed financial holding parent companies of those firms and to PRA or FCA-authorized financial institutions that are subsidiaries of those firms or parent companies. The U.K. first implemented MREL requirements in 2016, in line with the EU’s Bank Recovery and Resolution Directive, and updated those requirements 2018. In June 2018, the BoE announced that it would review MREL calibration and in December 2020 it published a Discussion Paper as the first stage of that Review. This latest consultation paper represents the second stage of the MREL Review, taking account of responses to the Discussion Paper. The consultation focuses on the following key issues:
    • Resolution strategy thresholds: firms offering transactional bank accounts via different business models, such as open banking and “linked accounts” technology, could, under BoE proposals, be subject to alternative resolution processes to reduce disruption in the event of insolvency. The BoE is considering either raising or removing entirely the MREL threshold for those firms. Changes to resolution strategies and MRELs for these firms are not expected until the end of 2022 at the earliest. In the meantime, the BoE proposes to make institution-specific judgements when setting resolution strategies while providing as much advance certainty as possible for when firms will need to start the transition to meet MREL requirements.
    • MREL calibration: the BoE is proposing to establish a “stepped glide-path” for new and growing (or “mid-tier”) banks to transition to end-state MREL, offering them more time to grow into their higher MREL requirements. Under the proposals, mid-tier banks should approach the BoE when they expect to be within three years of reaching total assets in excess of £15 billion. The BoE would then set a start date for their transition to end-state MREL. From that start date, firms would then have a further six years to meet the end-state threshold, with a flexible add-on of two more years at the BoE’s discretion (making a potential total of eight years from the transition start date).
    • MREL eligibility: the BoE is reminding firms to consider whether holding instruments issued prior to the application of the EU Capital Requirements Regulation (so-called “legacy capital instruments”) which do not meet MREL requirements may create difficulties for resolution. The BoE is also consulting on amendments to the MREL policy requiring that, from January 1, 2022, non-CET1 own funds instruments issued by non-resolution entity U.K. subsidiaries to holders outside the group should not be eligible to count towards external or internal MREL.
    • Intragroup MREL issues: the BoE is not proposing amendments to its policy on intragroup MREL distribution. However, the BoE may, in the future, consider issues relating to surplus MREL in more detail.

    Responses to the consultation paper should be submitted by October 1, 2021. The BoE intends to implement changes to MREL by the end of 2021, with the revised rules applying from January 2022.

    The operational guide offers practical information about how the BoE might execute a bail-in resolution. Alongside the guide, the BoE has also published draft Template Resolution Instruments to provide a starting point for the preparation of bail-in documentation.

    View Dave Ramsden's Statement on the July 2021 Resolution publications.

    View the BoE's consultation on its approach to setting MREL.

    View the BoE's operational guide on the execution of bail-in.

    View details of the BoE’s December 2020 Discussion Paper on MREL.

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