Mayur Patel’s Post

Bank of England Consults on MREL Framework Enhancements The Bank of England, as the UK resolution authority, has launched a consultation on the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). This is a crucial component ensuring that banks in distress can continue providing essential services, while investors, not taxpayers, bear the cost of any failure. 🔹 Key Proposals: • Simplifying and consolidating the MREL framework to enhance clarity and ease of implementation. • Ensuring alignment with international standards and responsiveness to market developments. • Adapting based on lessons learned from the framework’s application. 🔹 Themes of the Consultation: • Modifications to UK Capital Requirements Regulation (CRR) total loss-absorbing capacity (TLAC) provisions. • Updates to thresholds for resolution strategies. • Revisions based on the second assessment of the Resolvability Assessment Framework (RAF). 🗓️ Consultation Open Until 15 January 2025 https://lnkd.in/ep9kaEWd #FinancialStability #Banking #Regulation #MREL #BankofEngland

"With valid Legal Entity Identifiers (LEIs)". If you do not have an LEI yet, no less than 21 LEI Issuers are accredited by the Global Legal Entity Identifier Foundation (GLEIF) to service UK Legal Entities. See https://lnkd.in/dUwhijw4 If you have an LEI but it has not be renewed in the last 12 months, ensure it becomes valid again by contacting your LEI Issuer. #LEI #LEIIssuer

Regulation is key to the orderly functioning of a financial system. Participants in the financial services industry should welcome sensible regulation. This FT article reflects badly on the Bank of England as the concern raised is implausible. “The prospective correlations are everywhere, and it’s not difficult to imagine a scenario, such as malpractice at a financial sponsor or the bankruptcy of multiple portfolio companies, where risk correlations increase significantly, and liquidity evaporates, leaving banks open to severe, unexpected losses,” said Jackson." There are far bigger issues about which the Bank of England should worry. The quote above misunderstands portfolio theory, the growth of private credit, and the concept of correlated risks. It is frustrating that senior Bank of England regulators are spending their time on implausible scenarios and not on those more likely to cause a harmful impact.

The Bank of England proposes to increase the MREL threshold from £15-25bn to £20-30bn in line with nominal GDP growth. It's welcome that they have responded to repeated industry calls for indexation. Fixed thresholds lead to inflation drag, with more and more firms caught by the net. So one cheer to the Bank for acting on this. But unpredictable ad-hoc re-indexing is still hard to plan for and makes Britain uncompetitive versus more predictable regimes like the EU. It also does nothing to address the fundamental point that the threshold is far too low (and far lower than either the EU or US). This is partly because the Bank refuses to accept that the most likely and credible resolution strategy for a mid tier bank is a rescue by a bigger bank. That has always been the case, from Alliance & Leicester to SVB. The root cause for all this is the objectives set by politicians. Whilst the PRA has secondary objectives around international competitiveness and promoting competition, the Resolution Directorate part of the Bank has neither of these. The Prime Minister recently said "we will make sure that every regulator in this country -especially our economic and competition regulators - takes growth as seriously as this room does". Does that include the Bank of England I wonder? https://lnkd.in/g-FC86Ej

Sarah Breeden emphasises that the Bank of England's approach to financial stability focuses on ensuring the reliable provision of vital services to households and businesses, even during shocks. The Bank adopts a system-wide perspective, recognizing the interconnectedness of financial firms and markets. This approach considers the impact of policies on the entire system, aiming to prevent negative externalities and promote stability. The Bank identifies critical services relevant to financial stability, such as funding, saving, insurance, and payments. Macroprudential policy focuses on mitigating risks threatening the system, utilizing tools like stress testing and scenario analysis. The speech also discusses the balance between financial stability and economic growth. While the primary objective is stability, the Bank acknowledges the potential for regulatory adjustments that can enhance growth without jeopardizing the system's resilience. Firm Implications: Systemic Risk Management: Firms should adopt a system-wide perspective in risk management, understanding their interconnect edness with other market participants and the potential impact of their actions on the broader financial system. Regulatory Compliance: Firms must adhere to evolving macroprudential policies and regulations that address systemic risks and ensure the stability of vital financial services. Scenario Planning: Businesses should analyse scenarios to assess their resilience to severe but plausible shocks and adapt their strategies accordingly. Collaboration with Regulators: Firms should actively participate in system-wide exercises like the SWES and maintain an open dialogue with regulators to contribute to risk assessment and policy development. Growth Opportunities: Companies should explore opportunities arising from regulatory adjustments that promote economic growth while maintaining financial stability, such as in the pensions sector or SME financing. Operational Resilience: Firms must prioritise operational resilience to ensure the continuous provision of vital services, considering their operations and impact on the overall system's stability. The Bank of England's focus on financial stability centres on providing vital economic services. Firms must understand their role in the system and adopt a holistic approach to risk management and regulatory compliance to contribute to a resilient and sustainable financial system. #FinancialStability #SystemicRisk #MacroprudentialPolicy #BankofEngland #FinancialServices #EconomicGrowth #Resilience #RiskManagement #StressTesting #Regulation https://lnkd.in/e-zNmBac

The punch line here really is that Private Credit as a segment remains small relative to total debt and the economy, but the risks of contagion and banking instability cannot be ruled out. Last September, the International Organization of Securities Commissions (IOSCO) focused on four themes in a report on Emerging Risks in Private Finance: transparency, leverage, market integrity and risk transmission to the public markets. In December, the Federal Reserve, FDIC and Comptroller of the Currency issued a proposal for revised call report requirements that would include more nondepository and private credit data. The Financial Stability Oversight Council put it this way in its 2023 annual report: “Private credit is a relatively opaque segment of the broader financial market that warrants continued monitoring. Despite its accelerating growth, private credit still represents a relatively small portion of the U.S. economy and also presents limited liquidity transformation risks. However, the extent to which the private credit market poses financial stability risks remains uncertain.” https://lnkd.in/gMcwg64C

This post provides insightful commentary on the dynamics and risks associated with the private credit segment within the financial market. It highlights the concerns around transparency, leverage, market integrity, and the potential transmission of risks to public markets. The reference to regulatory efforts by organizations like IOSCO, the Federal Reserve, FDIC, Comptroller of the Currency, and the Financial Stability Oversight Council underscores the recognition of these risks and the importance of monitoring and addressing them to maintain financial stability. Overall, it emphasizes the need for continued vigilance and regulation in the private credit market to mitigate potential systemic risks.

Ruh Roh "One increasingly common practice is “amend and extend” (A&E), in which lenders agree to push back a loan’s maturity, usually in return for an even higher yield. “Payment-in-kind” practices (Piks), where borrowers with poor cash flow issue new debt in order to meet interest payments on the old debt, are also becoming widespread. This is Ponzi-type lending in which our old friends, the credit rating agencies – star players in the deteriorating standards of risk assessment that led up to the financial crisis – are again frequently complicit by assigning investment grade status. As one seasoned credit analyst put it to me: “Write what you like about private credit, but I would strongly advise you not to invest in it.” https://lnkd.in/ekXcsn5k

Courtesy of William Louch, here's yet another important statement by a UK regulator/financial institution, this time the Bank of England, on the challenges posed by the private equity industry to the wider economy. Lenders have been used to assessing risk on a case-by-case basis but it appears some banks may not have the right tools to consider their whole exposure in aggregate. As many portfolio companies are leveraged on years-old interest rates, the implications are clear: this is no longer a cottage industry, and there's potential for major stress to the whole financial system. This follows the Financial Conduct Authority's "Dear CEO" letter in March, which set out the parameters of its ongoing review of private market valuations. This review has significant implications for governance within funds and will likely require GPs to reach a new level of transparency and demonstrable risk mitigation, particularly where there are clear incentives that could influence valuations (e.g. fees or maturing debt). The #privateequity industry is currently rightly conducting a campaign to raise its profile as a vital component of economic growth and job creation in the UK. Alongside this, individual firms should be thinking about how they represent themselves to the full gamut of stakeholders during this rising wave of regulatory scrutiny.

Banking | Failing Banks, by S. A. Correia, S. Luck & E. Verner, as a NBER WP. "Failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive non-core funding." https://lnkd.in/dTSb8XuP