The Bank of England has published two important documents on resolution – an updated version of its approach to resolution and a consultation paper on setting internal MREL (minimum requirement for own funds and eligible liabilities).
The Bank of England has published two important documents on resolution – an updated version of its approach (PDF 729 KB) to resolution and a consultation paper (PDF 524 KB) on setting internal MREL (minimum required own funds and eligible liabilities).
Internal MREL requirements may be costly for banks to meet because in many cases this will involve some combination of (a) a legal entity restructuring to establish resolution entities (including in some cases a non-operational holding company); (b) a re-positioning of existing equity and debt issuance and intra-group down-streaming to align this with resolution entities and their material subsidiaries; (c) the conversion of existing intra-group debt into MREL-eligible instruments; and (d) putting additional intra-group equity and MREL-eligible debt down-streaming in place in order to meet internal MREL requirements.
Moreover, although the Bank’s proposals on internal MREL requirements are broadly in line with the EU Commission’s proposals to revise the Bank Recovery and Resolution Directive (‘BRRD2’), there are areas where the Bank’s proposals may differ from the EU-wide proposals, in terms of both substance and the timetable for implementation. These areas include what the Bank will publish on major UK banks’ resolution plans and the Bank’s assessment of their effectiveness; on what major UK banks will be encouraged to publish on their MREL resources; the basis on which internal MREL requirements will be set within the 75-90 percent range, in particular for ring fenced banks; and the timetable under which major UK banks will be expected to meet MREL requirements. However, any such divergences may be narrowed as the Bank and the EU finalise their positions and as the Basel Committee finalises its Pillar 3 disclosure standards.
The new version of the Bank’s approach to resolution document updates the 2014 version, not least to take into account the development of the Bank’s policy in areas such as operational continuity, valuation preparedness and the setting of (external) MREL for major UK banking groups.
The document contains one new policy announcement – that from 2019 the Bank will publish summaries of major UK firms’ resolution plans and the Bank’s assessment of their effectiveness. The Bank believes that greater transparency over the progress being made towards removing barriers to resolvability will incentivise firms to prioritise those actions.
Otherwise the document provides a useful reminder of:
In order to support the potential use of the bail-in tool, banks that might potentially be put into resolution are required to hold MREL - a minimum required amount of own funds and eligible liabilities (in essence, equity and subordinated debt). The Bank has already set out its approach to setting (‘external’) MREL for a ‘resolution entity’ (the entity that would be subject to the use of resolution powers under the preferred resolution strategy), and has published indicative group-level MREL targets for major UK banks to reach by 2019 and by 2022.
Internal MREL instruments are issued from legal entities (that are not themselves resolution entities) in a group to the parent resolution entity in their group. These instruments can be in the form of equity or debt, and are designed to be written down to absorb losses or converted into equity to recapitalise the entity that issues them without triggering the resolution of the issuing entity. Losses within a group would therefore be met by the shareholders and creditors of the resolution entity, as a result of putting the resolution entity into resolution.
The Bank’s consultation paper on internal MREL sets out proposals for:
For more information, please contact Clive Briault (mailto:firstname.lastname@example.org) or Fiona Fry (mailto:email@example.com).