The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden. The comment period for the consultation on MREL approach ends on October 01, 2021. PRA intends to finalize and publish a revised MREL Statement of Policy by the end of 2021; this policy is then expected to apply from January 2022. In his statement, Mr. Ramsden points out that these publications represent a further step toward maturity and toward the goals of ending too-big-to-fail and protecting banking customers from disruption if their bank were to fail.
Consultation Paper on MREL Review. The paper proposes a new, longer and more gradual transitional path for firms growing into MREL requirements. This proposal represents the second stage of the MREL review and is informed by the first stage, which took place in December 2020 through a discussion paper intended to collect stakeholder feedback. The proposals for an extended transition path are proportionate in implementation and directly respond to the stakeholder feedback, arguing for a "smoother climb." They are inherently flexible and agile as they allow for a further extension if unforeseen circumstances demand it; they enhance the transparency of the regime by being clearer when MREL requirements may start to apply to firms individually. The MREL review considers the resolution strategy thresholds, the calibration of MREL, instrument eligibility, and the application of MRELs within banking groups. Among others, BoE is proposing:
- Changes to the transactional accounts threshold. BoE considers that recent innovations in technology in the banking system may afford opportunities to mitigate disruptions that may occur in the insolvency of a failing mid-tier firm whose business model is dominated by transactional account banking. These developments include open banking and "linked accounts" technology. BoE is considering whether it could significantly raise or remove the transactional accounts threshold. This work would take some time to complete; thus, BoE would not envisage being able to make any consequential changes to resolution strategies and MREL requirements for individual firms before the end of 2022.
- Changes to the total assets threshold. BoE proposes a "stepped glide-path" for new and growing firms, with increased transparency and predictability of requirements to support firms planning their access to funding markets and retention, or otherwise of earnings. Firms will now have six years starting from the point at which their transition to end-state MREL begins, to meet their end-state MREL in full, with two intermediate steps to smooth the cliff-edge. In addition, firms will be able to apply for a "flexible add-on" of up to two more years, if market conditions or other circumstances warrant an extension. The proposals for a stepped glide-path and a flexible add-on are designed to recognize the experience of growing firms and their ability to access MREL investors, support funding market efficiency, and reduce uncertainty.
Operational Guide on Bail-In. The guide provides practical information on the ways in which BoE might execute a bail-in resolution and on the operational processes and arrangements that may be involved. It is intended to increase awareness and understanding of the actions that may take place in a bail-in resolution in UK. This guide is technical in nature and is likely to be of interest to those who may be directly affected by or involved in a bail-in. The guide sets out a stylized bail-in timeline, which includes ore-resolution contingency planning; resolution weekend; bail-in period; and end of bail in. Along with the guide, BoE also published the following three draft Template Resolution Instruments:
- Bail-in Resolution Instrument, which would be made by BoE at the point of entry into resolution; it would formally place the firm in resolution and contain actions to give effect to the bail-in, including the issuance of certificates of entitlement to creditors affected by the bail-in.
- Supplemental Bail-in Resolution Instrument, which would be made by BoE when BoE quantifies the level of recapitalization required for the firm in resolution, can determine the exchange ratio of certificates of entitlement of each class for shares in the firm, and is ready to start the process for exchange of certificates of entitlement.
- Onward Transfer Instrument, which would be made by BoE to give effect to the transfer of shares (or other compensation) to the certificates of entitlement holders who have exchanged their certificates of entitlement. Depending on the exchange timeline and response from certificates of entitlement holders, the transfer may take place in a single transfer to all relevant certificates of entitlement holders or in tranches to groups of certificates of entitlement holders.
- Statement from Dave Ramsden
- Consultation Paper on MREL Review (PDF)
- Operational Guide and Template Resolution Instruments
Comment Due Date: October 01, 2021
Keywords: Europe, UK, Banking, Resolution Planning, Bail In, MREL, Regulatory Capital, Basel, Proportionality, Operational Risk, Systemic Risk, Too Big to Fail, BoE
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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