Britain’s central bank, the Bank of England, revealed on Friday that it intends to carry out a consultation on its approach to setting a minimum requirement for own funds and eligible liabilities (MREL) for UK financial service providers, to minimise risks to financial stability and disruption to critical services and avoid government bail outs.
The bank published a “Framework of capital requirements for UK banks” on 1 December 2015, when it announced the consultation on measures to be taken regarding MREL.
MREL requires banks, building societies and certain investment firms to maintain sufficient equity and liabilities that are capable of credibly bearing losses in resolution. This is designed to ensure that if these firms are in crisis and are of a size or nature that makes insolvency an unsuitable option, their failure can be managed by the use of effective arrangements for resolution.
Following the financial crisis, several legislative changes were made in order to build comprehensive resolution frameworks to deal with bank failure and remove the public subsidy for banks that were thought to be “too big to fail”. This framework enables resolution authorities to either to ‘bail-in’ shareholders and creditors of the failed firm to allow its critical functions to continue, or to transfer these critical functions to an acquirer.
In this resolution framework, MREL will make these resolution strategies effective by ensuring that there are equity and liabilities within a financial services company that can credibly absorb losses and recapitalise businesses that need to continue operating. The probability and costs of financial crises can be considerably reduced by effective arrangements for resolving banks that fail materially. Also, effective resolution arrangements have been assessed to reduce the appropriate equity requirement for the banking system as a whole by about 5% of risk-weighted assets.
Governor of the Bank of England, Mark Carney, stated:
“The implementation of MREL is a crucial step forward in ensuring that any bank, large or small, carries sufficient resources to be resolved in an orderly wa