MREL rules could derail progress of challenger banks

Author: Olly Jackson | Published: 3 Sep 2018

The minimum requirement for own funds and eligible liabilities (MREL) is creating a cliff-edge for challenger banks, forcing them to hold the same level of capital as HSBC and Barclays.

Currently, banks that have between £15 billion ($19.4 billion) and £25 billion in risk weighted assets (RWAs), and between 40,000 and 80,000 transactional accounts are required to hold MREL that can be bailed in should a bank fail.

"This approach to setting MREL creates a cliff-edge effect as there is no proportionality in terms of size or business model," said Simon Hills, director of prudential policy at UK Finance.  

This is exacerbated for banks using the more conservative standardised approach to calculating credit risk RWAs compared to those on the internal ratings based approach.

According to Hills, a solution to this could be to increase the MREL threshold or to allow it to be set on a...