UK banks will have two years longer to raise about £20bn extra of special debt to prevent taxpayer bailouts, the Bank of England has said.
Banking supervisors at the BoE are writing to lenders to tell them of their bespoke level of debt that can convert to equity should they collapse, essentially forcing creditors and shareholders to be on the hook rather than taxpayers in an attempt to end “too big to fail” banks. This is known as “bail in”.
The BoE final rules on so-called MREL — or Minimum Requirement for Own Funds and Eligible Liabilities — will make the largest UK banks and building societies create a final level of debt for this purpose by 2022 rather than by 2020, as previously planned a year ago. They will have to meet interim requirements by 2020.
By 2022, the special debt lenders must hold will be the same level as the amount of normal minimum capital each has, equivalent to 18 per cent of a lender’s assets when measured by their riskiness, or 6.75 per cent of all of its assets, the BoE said.
While in line with global standards, this is lower than the 8 per cent of total assets currently being weighed by eurozone authorities.
There has been strong demand in the markets for bank debt this year, and UK lenders have been able to issue as much as $75bn debt. This means the shortfall of special debt predicted by the BoE last year has fallen from £27bn to £20bn. This is considered to be manageable.
Four banks — Barclays, HSBC, Royal Bank of Scotland and Standard Chartered — are already subject to similar rules set at a global level that come in by 2019. By meeting UK rules they will also fulfil their global obligations, which stipulate that the very largest and most complex banks must hold capital and special debt equivalent to 16 per cent of their assets when weighted for risk, or 6 per cent of their total assets.
“This policy is a signficant milestone on the journey to end Too Big to Fail in the UK,” said Mark Carney, governor of the BoE, who also chairs the group that sets the global rules. “The implementation of MREL will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need.”
The rules apply to lenders with balance sheets greater than £15bn. Lenders with fewer than 40,000 accounts will not have to raise this special debt and instead would be subject to normal insolvency rules if they failed, the BoE said.
Mid-size firms such as TSB and Clydesdale will have until 2020 to get their total MREL — which includes both normal capital and special debt — to 18 per cent of their assets when measured for risk, the BoE said.