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Politicians want growth; bank regulators want safety. This puts the watchdogs in an unenviable position. If they relax the rules and the economy expands, they are unlikely to get credit. If it all comes unstuck, they get hauled over the coals.
Spare a thought, then, for the Bank of England and its Prudential Regulation Authority, currently under pressure to cut red tape. Fortunately, there is one way it can do so without betraying its principles: by loosening its grip on smaller banks.
After the 2008 financial crisis, regulators ordered large banks to raise bonds that would be written down, or convert to equity, if losses mounted. That would reduce the risk of taxpayer-funded bailouts if they collapse. In the UK, the requirements — known by the ungainly acronym MREL — kick in when a lender has between £15bn and £25bn in assets.
The problem is, the economy has grown in nominal terms since those rules were set but the £25bn threshold has not. This is a big deal for banks that are close to the limit — as the PRA acknowledges. OSB Group, which started raising MREL-qualifying debt in 2023, paid £44mn in interest in the first half of last year — equivalent to almost 20 per cent of its pre-tax profit.
Companies on the edge can hold back on lending growth or make a major acquisition to try to make the higher costs worthwhile. Neither are good outcomes for the regulator.
The PRA’s proposed solution is to make MREL rules kick in between £20bn and £30bn, an increase of 20 per cent at the top end. It says this would reflect economic growth since it last reviewed the rules in 2021, and “future-proof” them so it does not need to keep making changes.
That seems like a nice gesture — except that nominal GDP has actually increased by 40 per cent since the current range was set in 2016. By the time the update is applied next year, that total should be more like 47 per cent, according to OBR forecasts. The range could be lifted to between £22bn and £37bn even before any “future-proofing”, or any adjustment in risk appetite.
The PRA can at least console itself with the knowledge that the UK had set more cautious limits than peers in the Eurozone and US. Small American lenders, with significant lobbying power, have long been accustomed to carve-outs and exceptions from onerous regulation on the grounds that they are important for employment and growth.
The PRA this week will begin sifting through responses to its consultation on the MREL proposals. Banks have been complaining about the threshold for years, so it already knows what most of the answers will say. This time it might be worth listening.
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