Moody's: Largest UK banks likely to meet estimated current GBP129 billion gross MREL shortfall by time of implementation

Despite a current GBP129 billion shortfall, the UK's seven largest banks (including Nationwide, the largest building society) will all likely meet the Bank of England's minimum requirement for own funds and eligible liabilities (MREL) by the time it comes into force, says Moody's Investors Service in a report published today.

"While we find considerable variation in gross MREL shortfalls, at between zero and GBP62 billion, based on end-2015 disclosures, we expect all of the UK's seven largest banks to meet the upcoming MREL requirements by January 2019 and or 2020, as appropriate," says Laurie Mayers, an Associate Managing Director at Moody's

The shortfalls equate to between zero and just over 4% of adjusted tangible banking assets per bank.

Moody's notes that banks have the ability to replace existing operating company funding with holding company issuance, or contractually subordinated issuance (in the case of Nationwide).

"It's likely that existing operating company senior unsecured debt, which ultimately will not be eligible for MREL, will be replaced with eligible holding company liabilities and contractually subordinated debt. If that happens, the current gross GBP129 billion shortfall, representing 2.9% of adjusted tangible banking assets, shrinks to a manageable GBP54 billion net shortfall," explains Ms. Mayers.

At present, based on Moody's calculations, six of the seven banks have a gross shortfall relative to likely MREL requirements, while only Standard Chartered has no gross shortfall. On a net shortfall basis, when including bank level senior unsecured debt, only HSBC Holdings, Barclays and Royal Bank of Scotland have a shortfall.

As a significant portion of senior debt does not meet MREL requirements, we are likely to see banks taking measures to address the deficit. This could include spreading maturities so that a greater proportion does not mature in less than one year, and rolling over structured notes into MREL-eligible "vanilla" debt to the extent they are not needed for operating bank funding.

MREL specifies the amount of capital which banks need to hold to protect against failure, as well as the amount of liabilities they would need to enable them to continue to provide critical functions in the event of a resolution.

The Bank of England is the first European resolution authority to publish its approach to setting MREL requirements which form part of the European Union's Bank Recovery and Resolution Directive (BRRD), the region's blueprint for an orderly resolution of a failed bank. These requirements build upon the existing "going concern" capital and leverage framework by adding a recapitalisation amount for more systemically important banks.

The estimates provided in this report are calculated using banks' latest public disclosures (end-2015, except for Nationwide). An analysis of debt-by-debt specifics, including those issued outside the European Economic Area, is beyond the scope of the report.

Moody's estimates are not directly comparable with the Bank of England's estimates, which are calculated at a different period end-date (end-2014). The Bank of England's estimates thus do not reflect changes in risk-weighted assets, capital requirements, so-called "Pillar 2A" assessments, senior debt and regulatory capital amounts since this period. In addition, the BoE has not disclosed in detail its estimation methodology and underlying assumptions.