Lloyds bulked up its bail-in buffers in 2018, issuing loss-absorbing debt and raising capital enough to far exceed its regulator-set minimum requirements for eligible liabilities.

The UK lender’s ratio of MREL to risk-weighted assets stood at 32.4% at year-end, up from 25.7% the year prior, and well above its target requirements, excluding regulatory buffers, of 20.7% for 2020 and 25.4% for 2022.

The MREL surge was powered by Lloyd’s issuance of £8.8 billion ($11.5 billion) of senior unsecured securities in 2018, which increased the bank’s total outstanding debt to £20.2 billion, up 87% from £10.8 billion a year ago.

Total funds and eligible liabilities rose to £66.8 billion at the end of last year, up 23% from £54.1 billion in 2017. Over the same period, Lloyds’ risk-weighted assets (RWAs) dropped £4.5 billion (2%) to £206.4 billion, contributing to the MREL ratio increase.

What is it?

MREL was established to ensure EU banks have sufficient capital and loss-absorbing debt to rule out the need for a taxpayer bail-out in the event of their collapse.

The Bank of England set out its policy for sizing MREL targets for each of the banks under its supervision in 2018. From 2020, each lender must hold MREL equivalent to two times its Pillar 1 plus Pillar 2A capital requirement, and from 2022, two times its Pillar 1 plus two times its Pillar 2A. On top of both targets, banks need additional MREL to meet capital conservation, systemic risk, countercyclical and other regulatory buffers.

The BoE indicated in 2018 that Lloyds’ 2020 MREL requirement including these buffers would be 24.7% and, in 2022, 30.1%.

The watchdog will review its MREL calibration in 2020 before setting final requirements to be met from 2022.

Why it matters

A glance at Lloyds’ MREL seems to indicate that the bank has plenty of loss-absorbing capacity in excess of the BoE’s minimum. But the fluid nature of the MREL targets means the bank, and its peers, have been building up their bail-in requirements somewhat in the dark.

The introduction of the systemic risk buffer in 2019 for UK banking groups’ ring-fenced units will increase their total capital requirements, and have a knock-on effect on their MREL targets, too. The size of this buffer was not disclosed by Lloyds in its fourth-quarter report.

The MREL requirement uplift expected by the ramping up of regulatory buffers like this one incentivises banks to overshoot their targets, which may explain why Lloyds went on a debt issuance spree last year. Sitting on a lusty ratio today, the bank may not need to issue any additional debt in 2019, so long as it can keep its RWAs under control.

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