The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold conditions

Consultation Paper 15/17 | Policy Statement 30/16 | Consultation Paper 44/15

Published on 27 July 2017

The minimum requirement for own funds and eligible liabilities (MREL) – buffers – CP15/17

This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposed expectations with regard to the relationship between MREL and buffer requirements, as well as the consequences of not meeting these.

This CP is relevant to all PRA-regulated banks, building societies and PRA-designated investment firms (‘firms’).

Summary of proposals

This CP proposes to update Supervisory Statement (SS) 16/16 ‘The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions’ (see Appendix).

In November 2016 the PRA published SS16/16, which sets out how the PRA views the relationship between MREL and the buffer requirements from the two going-concern regimes:

  • risk-weighted capital buffers: derived both from the Capital Requirements Directive and Capital Requirements Regulation (jointly ‘CRD IV’)  and from firm-specific capital requirements set by the PRA (the PRA buffer);  and
  • leverage buffers: buffers that form part of the UK leverage ratio framework as explained in Policy Statement (PS) 27/15 ‘Implementing a UK leverage ratio framework.’

SS16/16 states that the PRA expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the buffer requirements.

Subsequently, the PRA has been asked about the situation where MREL is calibrated on the basis of one capital regime (eg leverage, in circumstances where the leverage requirement is larger than the risk-weighted requirement), but the largest requirement for buffers derives from the other regime (eg risk-weighted capital).

The PRA believes this situation applies to a very small number of firms. Nonetheless, this CP proposes to update the SS to clarify that the expectations sets in SS16/16 are not intended to create a different buffer requirement from that which is usable in the going-concern regime.

Responses and next steps

This consultation closes on Friday 29 September 2017. The PRA has chosen a short consultation period, as it wishes to provide certainty on the policy in a timely fashion. The PRA aims to publish the updated supervisory statement before the end of 2017.

PDFConsultation Paper 15/17


Published on 8 November 2016

The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions – PS30/16

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback on responses to Consultation Paper (CP) 44/15 ‘The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions’ and sets out the final Supervisory Statement (SS) 16/16 on the relationship between MREL and buffers, and MREL and Threshold Conditions.

This PS is relevant to all PRA-regulated banks, building societies and PRA-designated investment firms (firms). Alongside this PS, the Bank of England (the Bank) has published a statement of policy on its approach to setting MREL in line with relevant legislation. Readers should consider the PRA’s PS in light of the Bank’s statement of policy and vice versa.

Feedback on consultation responses

The PRA received nine responses to CP44/15. Overall, the PRA does not consider that the responses require significant changes to its proposals. The PRA has made two amendments to the draft SS to provide further clarity to firms. The amendments concern the entry into force of the proposed policies and the relationship between the MREL buffer policy and restrictions on distributions. Chapter 2 explains these changes and provides several further minor clarifications in light of feedback received.

PDFPolicy Statement 30/16

Press release 


Published on 11 December 2015

The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions – CP44/15

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.

Responses

This consultation closed on Friday, 11 March 2016.

PDFConsultation Paper 44/15

Press release

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