Re: MREL27 Sep 2019 00:40
MREL is loss-absorbing capacity. Having enough MREL means that if a bank fails, its investors pay to resolve it, not the taxpayer.
This works because MREL is a mix of equity and unsecured debt. When a bank goes into resolution this unsecured debt is “bailed-in” (converted into equity). Shareholder capital can then be written off to cover the bank’s losses and to re-capitalise its surviving business, providing critical economic functions such as deposit-taking and payments. All this would be done without disrupting the bank’s customers, or reducing the supply of credit to the economy.
MREL is the last step in fixing “too big to fail”.
What do the numbers tell us?
By 1 January 2022, the six largest UK banks will hold MREL equivalent to between 21.6% and 25.9% of their Risk-Weighted Assets (RWAs). RWA is a measure of a bank’s assets or off-balance-sheet exposures, weighted by how risky they are. Banks have different MREL requirements because each has an individual resolution plan, with specific funding needs, that MREL aims to meet.
The average requirement for smaller banks is 22% of RWAs. These are Clydesdale Bank, Coventry Building Society, Metro Bank, Skipton Building Society, Tesco Bank, Virgin Money, and Yorkshire Building Society.
The burden on these smaller banks is too heavy. We have voiced concern before about the impact of MREL on banks that are not systemically important. We hope that the Bank of England will re-visit the 40,000 to 80,000 active account threshold in the future.
What happens next?
Banks will gradually build their stock of MREL-qualifying liabilities. We have to wait and see if the market has enough capacity to cover the scale of MREL needed over the next five years – across the EU, this may be €300bn.
The Bank of England plans to review the level of MREL requirements by the end of 2020, when it will set final MRELs. It may then take into account any difficulty banks have had in issuing qualifying liabilities.
The cost of MREL is unknown. The EBA has suggested that in the worst case it will approach the cost of equity, which it estimates as 8%. MREL is expensive for banks because investors have to be compensated for the risk of being bailed-in.
https://www.bba.org.uk/news/bba-voice/mrel-the-home-straight/#.XY039bfTUwB
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