The Bank of England's (BoE) recent Discussion Paper, as part of its review around the minimum requirements for eligible liabilities (MREL), addresses some of the challenges for mid-tier banks and building societies. Below we explore the areas of debate, along with suggestions to achieve a regime where firms can fail safely without imposing barriers to growth and competition.

Defining the new boundaries

The current threshold to move from an insolvency resolution strategy to ?partial transfer? is 40-80,000 transactional accounts (at least nine withdrawals within three months). The threshold for moving from partial transfer to a full bail-in is £15-£25 billion in total assets.

These criteria are measurable and transparent. However, they have not evolved with the market (e.g.: customers using multiple app-based accounts), don't capture the different business models, and do not take into account the BoE's competition objectives. There is now an opportunity to redefine and recalibrate these thresholds and put in place a more proportionate regime for mid-tier banks.  

One quick enhancement would be to focus on ?primary? transactional accounts (i.e.: containing salary payments, direct debits, etc). We also think that having multiple thresholds would allow for a more balanced view of which banks need to be in scope of the regime considering the risks to depositors, public funds, market confidence and business continuity.

What is the appropriate level of MREL for mid-tier firms?

Current MREL requirements are set at a target level of twice binding minimum capital requirements, which is a significant additional requirement on firms.

Many mid-tier firms are heavily funded by deposits which are not eligible liabilities for MREL. As a result, mid-tier firms in scope will need to issue unsecured debt, which is expensive and challenging when you don't have regular access to capital markets. The risk is that firms could decide to avoid coming into the scope of MREL by limiting their growth strategies, which would have the effect of negatively impacting market competition.

MREL requirements for mid-tier firms should therefore avoid 'step changes? which deter firms from scaling up. Instead they should increase proportionately over time, reflecting the changing circumstances and risks of each mid-tier firm given the wide divergence in business and operating models.

One approach is an annual quantitative assessment of the capital needed for the preferred resolution strategy. This could leverage established processes around capital planning (ICAAP), recovery planning and wind-down planning. Firms would need to adapt their stress testing and recovery / restructuring actions allowing them to evaluate how much capital would be needed to be bailed-in. New valuation in resolution capabilities could also be used for this analysis.

This MREL regime interacts with a variety of related regulations such as capital requirement regulation (CRR), the leverage ratio, resolvability assessment framework (RAF). Aligning the MREL criteria to these will help firms develop capabilities in a more efficient and cohesive way.

A MREL regime that works for all

We hope the ideas above will stimulate discussions in order to develop an MREL regime that protects financial stability but also supports competition, growth and innovation from mid-tier firms.

The views of third parties set out in this publication are not necessarily the views of the global EY organisation or its member firms. Moreover, they should be seen in the context of the time they were made.