The Bank of England has rightfully chosen to overhaul its minimum requirement for own funds and eligible liabilities (MREL) regime, unshackling the UK’s challenger banks. Metro Bank's latest set of results show just how transformative these new rules could be.
Under the new regime, unveiled last month, banks will not need to raise MREL-eligible debt until they have £25bn-£40bn in total assets, up from £15bn-£25bn. Instead, qualifying banks will now only need to meet their minimum capital requirements.
For a long time, MREL had been a soul of lead for the UK’s smaller lenders like Metro Bank, which said last week it has no imminent plans to raise MREL debt.
Metro, of course, has a chequered history with MREL.
It took the UK challenger bank two attempts to price its debut senior non-preferred note in 2019.
The first try for a £200m-£250m four year non-call three note was pulled, despite the promise of an at the time eyewatering 7.5% coupon. An even higher 9.5% coupon was eventually needed to secure a £350m six year non-call five note.
At the time, GlobalCapital reported the annual coupon payments on the note would eat up almost all of the bank's yearly underlying profit before tax.
Despite the expensive debt raise, the bank still slipped below its MREL targets the following year. A further costly MREL bond was avoided in late 2020 after Metro sold a £3bn mortgage portfolio to NatWest for cash.
However, this was only a temporary fix with MREL inflicting with yet another period of woe on Metro the following summer. The bank dipped below its targets again in 2023.
Fortunately, Metro did not shuffle off its MREL coil and fall foul of Threadneedle Street’s previously restrictive regime.
The outlook for the UK’s smaller banks now looks a lot brighter. Metro, with its £16.4bn in total assets at the end of the June, will no longer be subject to the same costly regime as its larger peers.
Of course, MREL has its place in the financial system, and those that fail to deploy these necessary guard rails should be rightfully punished. But for firms like Metro, being saddled with costly MREL debt seems like a punishment itself.
But now challenger banks like Metro do not have to spend a fortune financing and refinancing costly MREL debt, they can focus on other things — like challenging.