Roundup: Bank of England unveils policy to strengthen resilience of financial institutions in face of future crisis

The Bank of England (BOE) on Tuesday published its policy on the minimum capital requirements for banks and financial institutions, a move aimed to strengthen the resilience of the financial system during future shocks.

The policy known as Minimum Requirement for own Funds and Eligible Liabilities (MREL) aims to make it easier to manage the failure of banks and building societies, a process which will be handled by the BOE as the central bank and regulatory authority in the event of a failure. The BOE described the policy as "one of the last pillars of post-crisis reform".

During the financial crisis governments across the world were forced to bail-out failed banks, rather than risk the damage that a disorderly failure would bring on the wider economy and financial system, as there was no resolution process in place.

MREL is a requirement under the European Union Bank and Resolution Directive, which mean banks and building societies must hold sufficient equity and debt to absorb losses. It will allow the recapitalization of businesses that need to be kept operating during a crisis in order to prevent contagion spreading through the financial system.

MREL divides financial institutions into three categories, which each get different resolution strategies. The categories are: those with less than 40,000-80,000 transactional accounts; those with more than 40,000-80,000 accounts; and those with a balance sheet of over 15 billion pounds (18.55 billion U.S. dollars).

For the first of these groups, MREL merely requires them to hold assets on their balance sheet equal to the current capital requirements, and represents no change for them.

In the event of failure, these institutions can be allowed to fail as they do not provide a critical function within the financial system. Resolution would include a pay-out by the Financial Services Compensation Scheme for covered depositors.

For the second group, whose size and importance is reasonably significant in the financial system, a partial transfer takes place in a bid to recapitalize the institution to allow the critical parts of it to continue to function.

For the largest institutions, MREL is the same as for the middle-ranking group of institutions, with the addition that subordination takes place, meaning that creditors and shareholders will be liable for debt in a process known as "bail in".

The aim is that these institutions can be recapitalized to continue to operate and that the firm is able to operate without public support, avoiding the inflow of public money seen during the financial crisis when governments had to step in to save "Too Big To Fail" banks.

BOE governor Mark Carney said: "This policy is a significant milestone on the journey to end 'Too Big to Fail' in the UK. The implementation of MREL will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds and while allowing households and businesses to continue to access the services they need."

The MREL strategy will be introduced in two phases; an interim phase on Jan. 1, 2020, and full implementation two years later.

The two year delay to full implementation will allow banks to raise more assets as part of their MRELs. By 2022 the MREL should be 6.75 percent of all assets.

The BOE said that issuance of bank debt had been strong this year with 75 billion U.S. dollars issued so far.

This is likely to have a significant impact on bail-in debt levels as the last snapshot it took of the levels of bail-in debt at banks revealed a 20 billion pound shortfall at the end of 2015, down from 27 billion pounds at the end of 2014.

The BOE said it will require banks to issue the debt through holding companies, creating an easily accessible legal entity in the event of failure and providing an ordered process which, it is hoped, will help markets to manage better the shock of any future failures. Enditem