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MREL: a smoother transition for mid-tier firms

Paul Young Paul Young

The Bank of England has updated its plans for the minimum requirements for own funds and eligible liabilities (MREL). Paul Young takes a look at the key changes and how they will benefit in-scope firms.  

Originally introduced in 2016 as part of the Bank Recovery and Resolution Directive (BRRD), MREL requirements are under review as part of the Resolvability Assessment Framework (RAF). Applying to systemically important investment firms, banks, and building societies helps firms absorb losses and recapitalise in the event of a resolution. MREL must be held in conjunction with minimum capital requirements, and in-scope firms also face additional calculations for valuation in resolution, specifically assessing the equity and liquidation values.

Following the Bank of England’s (BoE) discussion paper in December 2020, the sector was concerned that the changes would disproportionately impact smaller firms and affect competition. The categories for MREL calibration were the key issue, which was determined by the type of resolution strategy applied, with thresholds based on total assets and the number of transactional accounts. While this approach seemed proportionate, moving between thresholds could see capital requirements doubling overnight, putting greater pressure on mid-tier firms and building societies in particular.

The recent consultation paper addresses these concerns and aims to create a smoother transition as firms’ MREL requirements increase.

The role of transactional accounts

At a glance, the three resolution strategies informing the MREL calculation are:

Modified insolvency

MREL is equal to minimum capital requirements for firms with less than 40,000 transactional accounts.

Partial transfer

MREL ranges from one to two times the minimum capital requirements for firms with 40,000-80,000 transactional accounts, less than £15-25 billion in assets, and which are subject to stabilisation and potentially provide other critical functions.


MREL is twice the minimum capital requirement for firms with more than 40,000 transactional accounts, over £15-25 billion in assets, and which are subject to stabilisation and potentially provide other critical functions.

The BoE considers that a banking insolvency procedure for firms with a large number of transactional accounts would temporarily disrupt customers’ payments and deposits, with a permanent loss of associated account data. As this would breach the special resolution objectives, the number of transactional accounts is a key factor in determining the firm’s resolution strategy and subsequent MREL requirements.

However, the BoE is considering the impact of new technology, such as open banking, to mitigate these disruptions. This could potentially remove or raise the transactional account threshold, keeping more firms under a modified insolvency procedure for longer and reducing the MREL requirement. But exploring these options will take time, with no announcement due before the end of 2022 at the earliest.

In the meantime, the BoE will take a judgment-based approach to firms moving across thresholds due to the number of transactional accounts. This will consider other critical functions and the ability to access funding markets to meet the capital requirement, with early engagement and advance warning of the MREL transition period. Firms under the partial transfer resolution plan due to the volume of transactional accounts will continue with that classification.

The stepped glide-path

Looking at last year’s discussion paper, one of the biggest concerns was the cliff edge between categories and the time needed to raise MREL capital. The recent consultation paper proposes a ‘stepped glide-path’, offering a staggered approach for firms to transition across the above categories. The updated framework gives a three-year notice period for a threshold change, with six years to meet MREL requirements and an additional two-year extension, where appropriate. The extension would typically be due to a change in the firm’s circumstances during the transitional period or a known barrier raised in advance.

Firms transitioning across the thresholds will have a staggered approach over those six years to gradually build MREL requirements. Expressed as a percentage of minimum capital requirements, an example transition for the total assets threshold would be:

Step one: two years to meet MREL at 33% of minimum capital requirements

Step two: four years to meet MREL at 66% of minimum capital requirements

Step three: six years to meet MREL at 100% of minimum capital requirements

Any firm that expects to hold more than £15 billion in assets in three years should notify the BoE to establish a transition plan.

MREL eligibility

A number of legacy capital instruments could pose challenges to resolvability, as they do not absorb loss to the extent required for effective resolution. As such, non-CET1 own funds instruments issued from a non-resolution entity to a holder outside the group will not be eligible to count as MREL capital from 1 January 2022.

Next steps

While MREL expectations remain high, the revised approach will create a smoother transition for mid-tier firms, supporting growth and competition in the long term. Successful application of the framework relies on firms keeping the BoE up to date on their projected growth, enabling the three-year notification period, and supporting a staggered approach to meeting MREL requirements.

For more information on MREL, get in touch with Paul Young.

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