UK Prudential Regulation Authority Proposes MREL Reporting Requirements

by Shearman & Sterling LLP
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The Prudential Regulation Authority has published proposals which would require firms to report on their progress in meeting their minimum requirement for own funds and eligible liabilities (MREL) requirement. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to UK authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to UK authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.

The PRA is proposing to amend the Supervisory Statement on Resolution Planning to set out its expectations on the information firms should provide in relation to their MREL requirement. The PRA would share the information received with the Bank of England which is the UK's resolution authority. The PRA intends to use the information received to monitor a firm's progress in complying with its MREL requirement and to assess whether a firm is, or is likely to be, in breach of its MREL requirement.

The BoE will set MREL on a firm-by-firm basis based on the resolution strategy allotted to firms. The three resolution strategies are modified insolvency (for firms with between 40,000 and 80,000 transactional accounts), partial transfer (for firms where there are real prospects of the critical economic functions being transferred to a purchaser) and bail-in (for firms with £15-25 billion assets). Global Systemically Important Banks and Domestic Systemically Important Banks will be bail-in firms.

Firms will be required to meet final MREL from January 1, 2022. G-SIBs with UK-incorporated resolution entities must meet an interim MREL of 16% of risk-weighted assets or 6% of leverage exposures (as per the TLAC standard) from January 1, 2019. G-SIBs and D-SIBs with UK-incorporated resolution entities must meet an interim MREL, from January 1, 2020, equivalent to the higher of two times their Pillar 1 requirements and their Pillar 2A capital requirement or two times the applicable leverage ratio requirement. Partial transfer firms must meet an interim MREL of 18% of RWAs by January 1, 2020. For modified insolvency firms, the BoE will set consolidated MREL at no higher than a firm’s current regulatory minimum capital requirements, with a final conformance date of January 1, 2022.

Responses to the PRA's proposals on MREL reporting are due by April 9, 2018.

View the consultation paper.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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