Internal MREL – consultation paper Andrew Gracie, Executive Director 19th October 2017

Contents Context: MREL What is internal MREL for? The policy Scope Calibration Eligibility Operational Continuity in Resolution Other MREL policy (MPE, deductions, disclosure, reporting) Revised Approach to Resolution publication

Context: MREL

Bank of England’s Statement of Policy on MREL The Bank set out its ‘MREL’ policy in November 2016. This sets a minimum amount of capital and debt firms must hold. MREL ensures there are enough resources at the resolution entity to absorb losses so that critical functions can continue to be provided.

MREL calibration

CMGs, resolution colleges Why is internal MREL policy needed now? Interim MREL Jan 2020 iMREL SoP H1 2018 G-SIB FSB TLAC deadline 1 Jan 2019 Final MREL Jan 2022 MREL SoP Nov 2016 iMREL CP Oct 2017 CMGs, resolution colleges SoP = Statement of Policy CP = Consultation Paper The consultation runs from 2 October to 2 January 2017.

How does internal MREL facilitate effective resolution?

How does internal MREL work? Material entities within a group structure are set internal MREL. Internal MREL is set on an individual basis for material subsidiaries. Internal MREL is set on a sub-consolidated basis for a material sub-group.

Losses absorbed by MREL: internal and external (3) Losses at the Operating company result in equity write-downs at the Holding company (4) The Bank of England triggers a write-down of the internal debt in the Operating company to recapitalise it, so it can continue to be authorised and deliver critical functions. (5) The Bank of England puts the group into resolution. The Bank ‘bails in’ external MREL at the Holding company, so restoring the Holding company’s capital position. (1) An Operating company experiences losses. (2) Losses use up Operating company’s capital – it is now failing. The group now meets capital requirements and is no longer failing or likely to fail.

How does internal MREL facilitate effective resolution? Resources where they’re needed most External MREL is applied to holding companies – but losses are experienced at operating companies. Internal MREL ensures operating companies have sufficient resources to be recapitalised in resolution. Removes incentive to run Internal MREL is subordinated to operating liabilities and so protects them from loss. That removes the incentive for depositors and market counterparties to run from a stressed firm. Facilitates home-host co-operation Provides assurance that resources are at the right places in the group to support critical functions.

Internal MREL: the policy

Internal MREL – main contents of policy Internal MREL should: implement FSB’s TLAC Standard and support cross-border co- operation contribute to feasible and credible resolution plans; leave a readily-available unallocated surplus MREL at group level; and apply the same eligibility criteria to regulatory capital as eligible liabilities. Scope Calibration Form

Scope Internal MREL will be set for material subsidiaries in the UK. Internal MREL in excess of regulatory capital requirements will be set for subsidiaries that are ‘material’. If these entities fail, groups may not be able to support them and may have to be resolved. Internal MREL* is not set No Is the subsidiary otherwise material to delivery of critical functions? No Does the subsidiary make up more than 5% of the group by RWAs, leverage exposure, or operating profits? In exceptional circumstances, internal MREL* set Yes Yes Internal MREL* set * above regulatory capital requirements

Scope We will set internal MREL in excess of regulatory requirements for subsidiaries and top entities in existing consolidations. We could make exceptions. Solo and sub-consolidations We will set internal MREL For solo (or solo consolidated) balance sheets For the top entities of existing consolidations or sub-consolidations based on consolidated balance sheet, e.g. RFB sub-groups UK sub-groups of overseas firms Exceptionally we might: Set internal MREL above regulatory capital requirements for a sub-group with material parts of the group in small subsidiaries where no prudential sub-consolidation exists. Allocate internal MREL above minimum capital requirements to overseas subgroups of UK firms where there are no host requirements.

Calibration Scaling internal MREL to leave a readily deployable surplus at group level.

Calibration To meet internal MREL, subsidiaries will need to issue internal instruments to the holding company to have most of what they need in a crisis. Internal MREL will be 75-90% of the external MREL an entity would be set – in line with FSB’s TLAC standard 75% 90% 100% Start at 75% and increase if… The Bank has doubts about the resolution strategy The group lacks readily available resources to support the subsidiary High scaling is applied by overseas authorities … except ring-fenced banks - start at 90% and decrease if satisfied group has enough readily deployable resources to support it … and except groups with simple structures: no scaling No double-counting of internal MREL in subsidiaries

Calibration Apart from scaling, internal MREL will be based on the same calibration and timetable as external MREL.

Subordinated long-term debt Form The Bank will be able to convert internal MREL resources into equity, or write them down, if necessary Subordination Contractual triggers Deposits An internal MREL instrument must provide the resolution authority of the subsidiary with the right to write it down or convert it to equity, where: The resolution authority determines that the subsidiary is failing or likely to fail and will, disregarding any write-down and/or conversion of the instruments, continue to be so; and, for non-UK groups, the home authority consents or does not object; or A resolution entity within the group is subject to resolution proceedings. Uncovered deposits Derivatives Other liabilities Senior liabilities Subordinated long-term debt Internal MREL Regulatory capital Internal MREL can be met through regulatory capital and other subordinated ‘eligible liabilities’.

Loss-absorbing capacity for operational continuity Purpose: After entry to resolution a firm may need to be restructured. Group service providers may need to incur costs as operations are re-sized. Each provider of critical services will need loss absorbing capacity to cover losses. Scope For regulated UK entities, we will require extra MREL. For unregulated critical service providers in UK groups we will require the regulated parent to downstream LAC. Calibration Providers will need to maintain LAC to cover at least 25% of annual operating costs of providing services; or more as the Bank deems necessary for a firm. Form LAC for OCIR must meet the same eligibility criteria as internal MREL. We may allow it to be maintained at the top of a servco sub-group.

Revised Approach to Resolution publication

Why did we revise the ‘Purple Book’? (1) Significant changes in the regime since 2014 These include: Legislative developments Policy developments Widened scope of the regime “ The Bank of England’s Approach to Resolution, from October 2014, is indeed the most readable of all the documents [on the UK resolution regime], but it is now clearly out of date. – Lord Tunnicliffe, 12 December 2016 ” (2) Provide greater clarity on what resolution entails Encourage greater public understanding of the regime Provide a useful reference for markets, media and analysts on resolution

What’s new in this version? Reflects our approach to resolvability including standards for loss absorbency (MREL), operational continuity and stays. Provides greater detail on our bail-in mechanic – that is, how we intend to implement a bail-in in practice. Outlines the Bank approach to funding in resolution.

Questions