Bank of England sets out bailout bond requirements for UK banks

The Bank of England on Friday made public for the first time how many special loss-absorbing bonds British-based banks must issue to prevent taxpayers having to pay for bank bailouts in the future.

by Huw Jones

The bonds, known as MREL, are aimed at ending “too big to fail” banks, which means banks will have enough resources to draw on in a crisis without going cap in hand to taxpayers.

MREL bonds convert into equity capital once a bank’s main capital reserves are burnt through. The MREL requirements come under European Union law and form the final leg of reforms introduced since the 2007-09 financial crisis.

The BoE said that from 2022, MREL would range from 21.6 percent of total value of exposures for Standard Chartered (STAN.L) to 25.9 percent for Santander UK (SAN.MC).

The central bank also gave an average indicative figure of 22 percent for a group of eight smaller banks, including the Co-operative Bank, Metro Bank, Tesco Bank and Virgin Money.

The BoE previously said how it planned to calculate this on Nov. 8. Banks also face an interim MREL target which applies from 2020.

The central bank had already told the banks what their individual MREL requirements would be, but the BoE has now published them to increase transparency.

On previous occasions when such bank capital or liquidity targets have been agreed, markets have put pressure on banks to comply sooner than the formal deadline in a bid to quash any doubts about solvency.

“It will bring pressure to be ‘in the pack’,” Rob Moulton, a financial services lawyer at Latham & Watkins, said.

Regulators have raised concerns about the ability of markets to absorb the number of bonds that banks across the EU will need to issue to comply with the MREL deadline. This has been estimated at 276 billion euros ($303.10 billion) for EU banks.

The world’s 30 biggest banks, which include Britain’s HSBC (BARC.L), Barclays (BARC.L), Standard Chartered (STAN.L) and RBS (RBS.L), must also comply with a tougher global equivalent of MREL, known as TLAC, over a similar time period.

“It would be very helpful if the Bank of England and authorities around the world were very clear that there is a transition period to getting to the TLAC end state, and that they are not expecting banks to get there more quickly,” Simon Hills, an executive director at the British Bankers’ Association, said.

Compliments of Reuters and Huw Jones