Bank of England Confirms its Approach to Setting Internal MREL in Groups
06/13/2018The Bank of England has published a Policy Statement setting out its feedback to the responses it received to its October 2017 consultation on its approach to setting a minimum requirement for own funds and eligible liabilities. 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 U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
The BoE's October 2017 consultation set out proposals for changes to the BoE's 2016 Statement of Policy on its approach to setting "external" MREL for resolution entities, to include the BoE's approach to "internal" MREL, i.e. instruments that are issued to a resolution entity from other legal entities in a group. Internal MREL is intended to cover U.K.-headquartered banking groups as well as U.K. subsidiaries of overseas banking groups.
The BoE is implementing its proposals largely as consulted on. However, it has made some small revisions to clarify internal MREL instrument eligibility, external MREL instrument eligibility and clean holding company requirements. Having considered consultation responses, the BoE will not be proceeding with its original proposal in the October 2017 consultation that critical service providers supporting the delivery of the group's critical functions must maintain financial resources equivalent to at least 25% of the annual operating costs of providing services. The BOE has also decided not to set requirements around the location and the form of surplus MREL at this stage.
The BoE will set MREL on a firm-by-firm basis. It will communicate in the second half of 2018 the interim internal MREL which it expects to apply from January 1, 2019 for relevant subsidiaries of Global Systemically Important Banks, subject to an EU joint decision for relevant subsidiaries on the basis of the revised Statement of Policy. The BoE plans to communicate in early 2019 the interim internal MREL it expects to apply from January 1, 2020 for relevant subsidiaries of non-G-SIBs, subject to an EU joint decision process for relevant subsidiaries on the basis of the revised Statement of Policy.
Given that external and internal MREL must be set on an annual basis, the Bank will engage with institutions at this time, as well as on an ongoing basis, to consider whether the transitional arrangements for meeting the interim or end-state MRELs remains appropriate.
View the Policy Statement.
View the updated Statement of Policy.
View details of the October 2017 consultation.
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