The Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

The Minimum Requirement for Own Funds and Eligible...

The Bank of England (resolution authority) will set MREL on a firm-specific basis, depending on the resolution strategy for the firm. It will take a proportionate approach, driven by a firm’s size, critical economic functions and the complexity of transferring these activities in resolution. This follows very closely a November 2014 paper from the European Banking Authority (EBA) on setting MREL.

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The Bank of England and the PRA are consulting on MREL requirements:

Consultation Paper: The Bank’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL) (Download PDF 238 KB)

The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions  (Download PDF 542 KB)

The Bank of England (resolution authority) will set MREL on a firm-specific basis, depending on the resolution strategy for the firm. It will take a proportionate approach, driven by a firm’s size, critical economic functions and the complexity of transferring these activities in resolution. This follows very closely a November 2014 paper from the European Banking Authority (EBA) on setting MREL.

MREL will be set as the sum of two components

  • A loss absorption amount to cover losses up to and in resolution; plus
  • A recapitalisation amount to enable the firm (or parts of it) to continue to meet authorisation conditions and maintain market confidence following resolution.

The loss absorption component will be based on the minimum capital requirement (pillar 1 and pillar 2), or any applicable leverage ratio if that is higher.

The recapitalisation component will be based on a firm’s recapitalisation needs post resolution as determined by the PRA (supervisory authority). As in the earlier EBA paper, the recapitalisation amount is likely to be at least equal to existing capital requirements for firms which need a bail-in strategy to continue operating. But a smaller recapitalisation amount may be required by firms for firms for which part of the business could be transferred to a private sector purchaser or temporarily to a bridge bank in resolution. And the recapitalisation requirement will be zero for firms that would be put into insolvency rather than resolution.

Banks can meet their MREL by counting eligible liabilities (regulatory capital and other long term liabilities which are bail-inable and not subject to preference in insolvency) in addition to CET1 regulatory capital. However, UK banks will not be allowed to double count their CET1 capital towards both MREL and risk-weighted capital and leverage buffers (including capital conservation buffer, G-SIB and D-SIB buffer, systemic risk buffer, countercyclical capital buffer, and Pillar 2 capital add-ons). A bank would have to meet its MREL over and above meeting these buffers.
 

As an illustrative example:

Minimum requirements    Bank capital and other eligible liabilities 
 
Case 1 Case 2
CET1 minimum under CRR   4.5% CET1 13.0% 13.0%
Capital conservation buffer (CET1)  2.5% Other regulatory capital  2.0%  2.0%
Other buffers (CET1)  5.0% Eligible long term debt  9.0% 11.0%
Total CET1 requirement 12.0% Meets minimum capital and capital buffer requirements? Yes Yes
MREL requirement 18.0% Meets MREL requirements? No – MREL only 16.5% (7.5% of CET1 capital is assigned against capital buffers) Yes- MREL of 18.5% (7.5% of CET1 capital is assigned against capital buffers)
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