BOE clarifies MREL, capital and leverage buffer requirements
The Bank of England's Prudential Regulation Authority (PRA) has clarified its expectations for banks regarding the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). The statement details the relationship between MREL and capital/leverage ratio buffers, and the implications of MREL breaches for Threshold Conditions.
No double counting for MREL and buffers
The Prudential Regulation Authority (PRA) expects firms to meet both the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and maintain Common Equity Tier 1 (CET1) capital for their risk-weighted capital and leverage ratio buffers.
Crucially, firms are prohibited from double-counting CET1 towards both MREL and these buffer requirements.
The amount reflecting risk-weighted capital and leverage buffers must be calculated as the CET1 a firm is required to maintain in addition to the larger of its risk-weighted capital or leverage minimums.
The PRA's capital buffer framework includes the CRD V combined buffer (comprising the capital conservation, countercyclical, G-SII, and O-SII buffers) and the PRA buffer.
Similarly, the leverage ratio framework includes the countercyclical leverage ratio buffer (CCLB) and a G-SII additional leverage ratio buffer (G-SII ALRB).
These buffers are always maintained in addition to minimum risk-weighted capital and leverage requirements, ensuring a robust capital base for firms.
Breaching MREL: Supervisory action ahead
Should a firm anticipate or experience insufficient Common Equity Tier 1 (CET1) to meet its buffers, beyond its Minimum Requirement for Own Funds and Eligible Liabilities (MREL), it will be deemed to have utilised its buffers.
This necessitates prompt notification to the Prudential Regulation Authority (PRA) and the submission of a capital restoration plan.
The PRA will then initiate enhanced supervisory action, potentially invoking powers under Section 55M of FSMA to mandate capital strengthening measures, including restricting distributions.
A breach or likely breach of MREL will also trigger a PRA investigation into whether the firm is failing to satisfy the statutory Threshold Conditions, which are fundamental to the PRA's regulatory regime.
This review, while not automatically implying failure, highlights the critical importance of MREL compliance.
Clarity, but no revolution
The Supervisory Statement provides essential clarity on the complex interplay between MREL and capital buffers, a long-standing point of regulatory focus.
While not introducing new policy, it reinforces the PRA's commitment to robust resolution frameworks and prudent capital management.
For firms, the key takeaway is the strict prohibition on double-counting, demanding meticulous capital planning to avoid supervisory intervention.