May 4, 2017 / 1:36 PM / 4 months ago

UK banks set for MREL guidance from regulator

LONDON, May 4 (IFR) - The Bank of England will soon publish final guidance for how much loss-absorbing debt Britain's major banks will each need to hold, as part of plans to better protect savers and taxpayers.

It is a key issue for the capital planning of the likes of HSBC, Barclays and Standard Chartered, and could see an additional £150bn of loss-absorbing debt issued.

The BoE set out guidelines in November on what banks will need to hold for so-called minimum requirement for own funds and eligible liabilities (MREL).

MREL requirements are similar to and overlap with global rules requiring banks to hold total loss-absorbing capacity (TLAC). The central bank told UK politicians last week it will "shortly" publish loss-absorbing requirements for individual firms to improve transparency. Industry sources said they expect it in the coming weeks, maybe even this week. The BoE declined to comment on specific timing.

HSBC indicated on Thursday the final guidelines will be favourable for the industry - at least compared to previous expectations.

HSBC said after new guidance from the BoE it now expects issuance of MREL-eligible debt to be near the lower end of its previous guidance of US$60bn-$80bn.

"There’s no question the guidance is helpful and it would indicate we’re going to be at the lower end of the range we have indicated,” Iain Mackay, finance director, told reporters after first-quarter results.

HSBC issued US$31bn of the debt last year, and expected to issue about US$30bn this year and any remaining requirement in 2018. Mackay said this year's issuance would now be reduced, and it had already met its 2019 MREL requirement.

The bank previously said the interest costs for TLAC issuance could rise to US$900m this year from US$400m in 2016. Mackay said it was now likely to be US$500m-$600m.

RESOLUTION PLANNING

The BoE's response to a UK Treasury Committee's inquiry into bank capital, published last week, said major banks had issued a further £65bn of senior unsecured holding company debt over the past two years, which qualifies as MREL.

It estimated the banks will need to issue around an additional £150bn of MREL-eligible equity and debt to meet a loss-absorbing requirement of 28% of RWAs, which will mostly involve replacing and restructuring maturing debt rather than issuing net new debt.

The key issue for the requirements of individual banks relates to whether the BoE makes adjustments to Pillar 2A capital. Pillar 2A covers risks that are not captured under core capital requirements for credit, operational and market risk, and gives regulators tools to deal with areas such as systemic, strategic, liquidity or concentration risks.

The purpose of both MREL and TLAC is to allow regulators to intervene when a firm gets into trouble, and force bondholders to take losses and prevent a repeat of the taxpayer bailouts seen during the 2008/09 financial crisis.

The BoE said in November that big banks will be required to meet MREL of twice their Pillar 1 plus Pillar 2A capital, or the higher of twice any leverage ratio requirement or 6.75% of leverage exposures. They need to meet that by 2022.

It also set a transitional requirement. By the start of 2020, banks need to meet an MREL of two times their Pillar 1 plus one time their Pillar 2A add-ons, or twice their leverage ratio requirement. (Reporting by Steve Slater)

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