Resolution is the catch phrase for who bails out (or in) a bank failure and its consequences, and issues relating to resolution has been one of the key challenges facing the industry and its supervisors along with the concept of risk governance. Should shareholders, creditors or the taxpayer fund bank losses?
UK authorities have several public policy goals in mind which given our memory of the 2008-10 period, are self evident. The UK position is that notwithstanding the risk of bank failures, the continuity of banking and payment services are paramount, overall confidence in the UK financial system is a key aim, and that depositors and others should be protected, but ideally by minimising public support. Such issues have been debated including by Admati and Hellwig in their book The Banker's New Clothes. With this in mind, the UK announced MREL or the Minimum Requirement for own funds and External Liabilities.
Earlier this month, the BOE announced MREL requirements for UK banks such as HSBC, Barclays and others (certain banks where exempted such as Co-op). In effect, there is a 2020 requirement and a 2022 or final requirement which indicates total MREL resources of 22% to 24.5% in the interim period which grows by 2022 to over 28% in certain cases when buffers are added. The methodology includes a going concern capital requirement, usually around 11-13%. On top of that, a gone concern capital level is added of 8% to reach the 22-24.5% level. Going concern capital includes equity and retained earnings while gone concern capital includes debt instruments designed to absorb losses in the event of failure.
Such levels of leverage (low) would argue well in favor of the objectives stated above, including a significantly resilient UK banking system, though at a cost to ROA and ROE given the drag associated with greater debt costs from the sub debt instruments associated with gone concern.
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