The Bank of England is today announcing new rules designed to make it easier to manage the failure of banks and building societies in an orderly way, as part of reforms to end taxpayer bailouts in the UK.
During the financial crisis, governments were forced to bail out failing banks, rather than risk the damage that a disorderly failure would have had on the wider economy and financial system. Some banks were too big to be allowed to fail.
Today, following a public consultation, the Bank of England are publishing their policy on setting the Minimum Requirement for own funds and Eligible Liabilities (MREL), which is a requirement under the EU Bank Recovery and Resolution Directive. These requirements will make it possible to resolve failing banks by ensuring that they hold sufficient equity and debt to absorb losses. It will enable the recapitalisation of businesses that need to keep operating during the process because they provide important financial services to households and businesses. This process is called ‘bail-in’.
Banks structured to support resolution
These rules represent one of the last pillars of post-crisis reforms designed to make banks safer and more resilient, and to avoid taxpayer bailouts in future. Banks are now required to hold several times more loss-absorbing resources than they did before the crisis, while annual stress tests check firms’ resilience to severe but plausible shocks. Banks are now also structured in a way that supports resolution. The Bank of England now has the legal powers necessary to manage the failure of a bank, and significant progress has been made to ensure there is coordination between national authorities should a large international bank fail.
The new rules will be introduced in two phases. Banks will be obliged to comply with interim requirements by 2020. From 1 January 2022, the largest UK banks will hold sufficient resources to allow the Bank of England to resolve them in an orderly way.
Mark Carney, Governor of the Bank of England, said: ‘This policy is 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.’
Useful links:
- The Bank of England’s approach to setting a Minimum Requirement for own funds and Eligible Liabilities (MREL) – responses to consultation and Statement of Policy
- Policy Statement: PS30/16 – The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions
- Supervisory Statement: SS16/16 – The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions