The Bank of England will maintain a £15bn-£25bn total asset threshold for determining when firms must meet a bail-in strategy for the minimum requirements for own funds and eligible liabilities (MREL), despite pressure from industry.
The decision was announced at the end of last week, when the Prudential Regulatory Authority published a final policy statement following its review into MREL.
Market participants had wanted the Bank to lift its total asset threshold to ease the pressure on mid-tier UK banks, which have sometimes had difficulty selling bail-inable debt in the capital markets.
Metro Bank, for instance, paid a 9.5% coupon on a £350m six year non-preferred senior bond in October 2019, which translated into £33.25m of annual interest expenditure — nearly enough to completely obliterate its profits for the prior year.
But the PRA said that if a bank with £15bn-£25bn in total assets were to enter insolvency, it “would be unlikely to serve the public interest effectively, and MREL is therefore required to support a bail-in resolution strategy”.
John Cronin, an analyst at Goodbody, said there were no “great surprises” in the final policy statement, which was largely in line with a consultation paper published in July.
“While we were disappointed by the disinclination to revise the £15-£25bn threshold significantly upwards, we recognise that the BoE has made helpful adjustments to its policy in the case of growing firms, and we are pleased to see the BoE remain committed to considering changes to the transactional accounts threshold,” he said.
Under the terms of the UK’s new MREL policy, firms that expect to grow into the £15bn-£25bn threshold will benefit from a more favourable transition period.
Growing firms will be given at least three years’ advance notice of the starting date for their MREL transition periods.
They will then either be asked to meet three-step glide path — 33% of their MREL of their requirements by the end of year two, 66% by the end of year four, and 100% at the end of year six — or a two-step glide path — 50% by the end of year three and 100% by the end of year six.
Banks will be also able to apply for a “flexible add-on” of up to two years in extenuating circumstances, including if market conditions prove challenging.
The Bank has not yet committed to changing the threshold that requires banks to adopt a partial transfer resolution strategy, which is when they have 40,000-80,000 transactional accounts — accounts from which withdrawals have been made nine or month times within three months.
It will consult with industry, the Financial Conduct Authority, the Financial Services Compensation Scheme and the PRA to try and find alternative processes with less risk of disruption to transactional accounts in the event of insolvency.
“The Bank is considering whether it could significantly raise or remove the indicative 40,000 to 80,000 transactional accounts threshold for the adoption of a partial transfer strategy and, therefore, an MREL that is above a firm’s total capital requirement,” the Bank said.