Regulation: English-law bonds could be excluded from MREL post-Brexit


Graham Bippart
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Banks in the eurozone will not be able to count any of their English-law bail-inable debt toward their pending requirements if no Brexit deal is reached between the EU and UK – translating into some €126 billion of subordinated bonds.


The European Banking Authority, which oversees the union’s banking system, already warned in October that English-law bonds now counting toward the EU’s minimum requirement for own funds and eligible liabilities (MREL) could be discounted once the UK leaves the EU.

However, the Single Resolution Board (SRB), which sets the requirements for banks in the eurozone, announced that liabilities issued under third-country law will be excluded from MREL unless the bank can show that their write-down or bail-in would “be effective”.

That essentially means the UK would have to statutorily recognize the authority of the EU to bail-in or write down such bonds, or alternatively that banks would have to add contractual clauses recognizing that authority.

The latter option, in turn, would require issuers of such bonds to go through consent solicitations on each issue to maintain eligibility – something investors would almost certainly demand a premium for.

Many bankers don’t expect the exclusion to apply to outstanding bonds, which would only make it more onerous for their banks to comply.

However, people familiar with the SRB’s thinking said that, while they don’t know the volume of outstanding bonds that would be affected, a no-deal Brexit would mean outstanding bonds based on English law would not count toward requirements – though banks will have a maximum four-year transition period to meet their targets.

Nomura researchers estimated in October that €126 billion in tier two and additional tier-one bonds issued by EU institutions would be hit by the exclusion.

The exclusion “fits well with the global trend that resolution authorities and regulators prefer home country law,” says one senior European FIG banker, who nonetheless thinks outstanding bonds will be treated leniently by the SRB. “It’s a global trend you see everywhere: the US, Switzerland, Japan, Europe.

“If you have to make a framework operational under which you need to resolve a bank, you don’t want legal surprises popping up from laws you don’t fully understand.”

Reciprocal arrangement

Jeremy Jennings-Mares, partner at Morrison & Foerster in London, says the market expects a reciprocal arrangement between the EU and the UK to recognise each other’s resolution authority.

“Given there will be a lot of non-EU law bonds out there, and many that aren’t going to realistically have contractual recognition language in them, one would hope that’s going to be the case,” he says.

The SRB will scale the minimum requirement for subordinated debt to the class of institution. Global systemically important institutions, for example Deutsche Bank, will have to have 13.5% of risk-weighted assets (RWAs) in subordinated eligible liabilities plus capital buffers. Other systemically important institutions will have to hold 12% of RWAs, plus capital buffers. The remaining banks’ requirements will be determined individually.

On Thursday, the SRB announced its annual policy for MREL in 2018, which will also include setting binding requirements for most of the largest and most complex banking groups in the banking union – said to be around 40 banks. The board plans to issue those binding requirements between now and the end of the first quarter 2018.

The four-year transition period for compliance will be set on an individual basis, depending on bilateral negotiations with the SRB around factors such as issuance and market capability. Those requirements will be based on the European Central Bank’s 2016 Supervisory Review and Evaluation Process (SREP), which sets Pillar 2 capital requirements for banks on an individual level each year.

Smaller, simpler banks will be given “informative”, or non-binding, targets. All in, authorities estimate that of all the banks in the 19 relevant jurisdictions, there will be a €117 billion aggregate MREL shortfall. That number is based on a sample of 76 banks, or around 80% of eurozone banks.

The targets will be revised every year, based on annual SREP figures, as well as bank-specific adjustments such as changes in RWAs.


On average, banks are expected to meet an MREL equivalent of 26% of their RWAs ­– a number largely in line with expectations.

Though bankers are sanguine that a four-year maximum transition period would be enough to fulfil requirements for the vast majority of banks, it isn’t clear, according to one of the people familiar with the SRB’s thinking, that banks fully understand what instruments are eligible.

“Structured notes aren’t eligible,” says the person, suggesting many bankers are under the impression they do count toward their MREL requirements.

The SRB said that non-covered, non-preferred deposits will be excluded from MREL totals unless banks can prove they are “non-breakable” – can’t be withdrawn – for at least one year, the minimum tenor of eligible instruments.

Though liabilities held by retail investors will count, the SRB says “holdings of such instruments could prove to be an impediment to resolution”, suggesting that such liabilities will influence banks’ individual targets.