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UK MREL Requirement

8 May 2017 by Gary Kirk

On Friday the Bank of England (BoE) released the Minimum Requirements for Eligible Liabilities (MREL) as part of the resolution strategy for UK banks. Effectively MREL is the minimum loss-absorbing capacity that a deposit holder (bank) must hold. It comprises both going concern capital (typically equity and retained earnings that absorb losses and enable a bank to continue operations); and gone concern capital (typically debt instruments that absorb losses in the event of insolvency).

Large banks have both gone concern and going concern capital but smaller institutions are only required gone concern (as, in the event of insolvency, they are unlikely to pose a contagion effect across the wider economy).

The BoE have determined that by 1 January 2022 ‘large institutions’ are required to hold a total MREL amount that is equivalent to at least twice their going concern requirements. To enable the banks to conform to this minimum requirement the BoE has set an interim date (31-Dec-2020) where indicative levels of loss-absorbing capital will need to be achieved and the final indicative amount set. However, the BoE will approach the minimum requirement by way of calibration methodology in 2020, and given the buffer capital is variable from institution to institution and from year-to-year, the overall total requirements can only be indicative at this stage.

There is another group of ‘medium-size’ institutions that are not domestically systematically important, but do adhere to a resolution plan rather than merely rely on the insolvency regime (i.e. enabling them to merely hold gone concern capital). These institutions are Clydesdale Bank, Co-operative Bank*, Coventry Building Society, Metro Bank, Skipton Building Society, Tesco Bank, Virgin Bank and Yorkshire Building Society. Their average indicative MREL has been set at 18% for the interim period to 31-Dec-2020, rising to 22% by 2022 (25.5% including buffer capital).  *Although by nature of the fact that Co-operative Bank is currently in the process of seeking a sale, it has currently been excluded from the calculation table.

There were no surprises in this BoE release; the MREL requirements look very achievable in the transition period allowed. As example, Barclay’s MREL position at holding company level was already 21.6% (as at the end of Q1-2017), RBS was at 24.9% (i.e. ahead of the 2020 requirement and more than double the capital ratio of 10.9% they held in 2008), and HSBC was at 21.8% at the end of March. Standard Chartered announced back in April that it has already surpassed its 2020 MREL requirement, as has Nationwide Society who are assessed on their leverage ratio rather than their capital ratio.

We believe this is yet another illustration that the UK banking sector is in good health and compares well to other sectors in the fixed income world from a relative value perspective.



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