In this consultation paper (CP) the Prudential Regulation Authority (PRA) sets out its proposals regarding the relationship between MREL and regulatory buffers. The CP also sets out the PRA’s proposals regarding the relationship between MREL and the PRA’s Threshold Conditions, which provide the minimum requirements that firms must meet in order to be permitted to carry on the regulated activities in which they engage.
Alongside this CP, the Bank of England is consulting on its approach to setting MREL in line with relevant legislation. Readers should consider the Bank’s consultation and proposed Statement of Policy in light of the PRA’s proposals, and vice versa. Readers should also consider the update to CP38/15 ‘Ensuring operational continuity in resolution’ published alongside these consultation papers.
This CP is relevant to all PRA-regulated banks, building societies and PRA-designated investment firms.
Summary of proposals
With regard to regulatory buffers, chapter 3 covers the PRA’s proposed relationship between MREL and:
- risk-weighted capital buffers: derived from the Capital Requirements Directive and Capital Requirements Regulation (CRD IV) and the PRA buffer derived from firm-specific capital requirements set by the PRA (see PS17/15 ‘Assessing capital adequacy under Pillar 2’); and
- leverage buffers: buffers that form part of the UK leverage ratio framework as explained in the PRA Policy Statement 27/15 ‘Implementing a UK leverage ratio framework’.
The PRA proposes that firms should not be able to double count common equity tier 1 (CET1) capital towards, on the one hand, MREL, and, on the other, risk-weighted capital and leverage buffers. This preserves the buffers’ purpose of providing going concern loss absorbency. Depending on their business model and liability structure, firms may need to increase financial resources to avoid the double counting.
With regard to Threshold Conditions, chapter 4 covers the PRA’s proposals that a firm in breach of MREL should expect the PRA to investigate whether the firm is failing, or likely to fail, to satisfy the Threshold Conditions with a view to taking further action as necessary. It is important to note that a breach of MREL does not automatically mean that the PRA will consider the firm is failing, or likely to fail, to satisfy the Threshold Conditions.
The PRA has considered the Financial Stability Board’s total loss absorbing capacity (TLAC) standard when proposing the policies explained in this CP. The policies are aligned with the TLAC proposals not to double count CET1 capital towards, on the one hand, TLAC, and, on the other, regulatory buffers. They are also aligned with the TLAC proposals to treat a breach or likely breach of TLAC as seriously as a breach or likely breach of minimum regulatory capital requirements.
Chapter 5 considers the PRA’s statutory obligations in relation to the proposed policies.
This consultation closed on Friday, 11 March 2016.
The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions – CP44/15