Large UK banks given two extra years to meet 'bail in' requirements

It has now published its final rules on 'minimum requirement for own funds and eligible liabilities' (MREL), which it described as "one of the last pillars of post-crisis reforms". An interim version of the rules will come into force in 2020. The largest, global systemically important banks (G-SIBs), will also be subject to total loss-absorbing capacity (TLAC) buffer requirements from 2019.

UK G-SIBs are expected to be required to hold MREL equivalent to their normal minimum capital, or 6.75% of their total assets if higher, the Bank of England said. It intends to review these levels before the end of 2020. MREL is a special kind of debt that can be converted to equity and used to 'bail-in' and recapitalise the business if required.

Bank of England governor Mark Carney described the policy, which was developed to meet requirements set out in the EU's Bank Resolution and Recovery Directive, as 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 whilst allowing households and businesses to continue to access the services they need," he said.

The Bank of England's regulatory arm, the Prudential Regulation Authority (PRA), will set MREL on a per-institution basis. Banks will be subject to one of three broad resolution strategies, proportionate to the risk that bank's failure would pose to economic stability.

For smaller firms, whose account-holders are entirely covered by the Financial Services Compensation Scheme (FSCS) deposit guarantee, a modified insolvency procedure would apply in the event of failure. These firms will be judged to have met the MREL requirements simply by meeting their existing capital requirements. The PRA has modified its final rules following consultation so that firms providing 40,000 transactional bank accounts or fewer would be subject to these rules in the event of failure.

For larger firms that are judged to be too large for the modified insolvency process, MREL will be set at a level which would enable the PRA to recapitalise critical parts of the business. Only the largest and most complex firms will be subject to the full MREL requirements and have to hold sufficient MREL to absorb losses and be fully recapitalised in the event of their failure, according to the PRA. The aim for these firms is to be able to operate without public support.

The PRA's current resolution framework came into force in January 2015. Banks are also now required to hold several times more loss-absorbing resources than they did before the crisis, which are subject to annual 'stress tests' to confirm that the firm remains resilient to severe but plausible economic shocks.