As with a number of regulatory requirements, the resolution strategy for a firm can change as a bank grows and matures, from the use of the Bank Insolvency Procedure for small firms, up to Bail-in for the largest banks. For the latter, there are Operational Continuity requirements and the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) that must be met, and for which firms must plan well in advance. 9  Technically this is cancelling the permission to carry out regulated activities granted by the PRA under Part 4A of the Financial Services and Markets Act 2000 (as amended). 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  This year the Bank will review the calibration of MREL, and the compliance date, prior to setting end-state MREL. I mention this because the Bank will take account of changes in the UK regulatory framework over the past few years as well as firms’ experience in issuing liabilities to meet their interim MREL requirements. So watch this space. I can also confirm that the Bank’s Financial Policy Committee and Prudential Regulation Committee intend to conduct a review of the UK leverage ratio framework in light of revised international standards and the nature of the relationship with the EU going forward. And let me add that I am very much aware of how these two policies interact. Moving mountains? Today’s draft Supervisory Statement is designed to deliver a clear map from the bottom of the regulatory mountain to the top.
These products were viewed as “safe” since, after all, the funds were only exposed for a short period of time, and in the case of repo, they were secured by collateral. On the demand side, setting aside any possible instabilities in this funding source, it was more profitable to use shorter-term funds to finance longer-term assets. In fact, the growing reliance on short-term wholesale funding to finance longer-term assets increased liquidity and maturity mismatch risk in the financial system. This was particularly dangerous because many of the assets being financed were structured-credit products, some of which were opaque, difficult to value and illiquid. In periods of market stress, these features increase the run risk by funding providers. BIS central bankers’ speeches  1  Short-term funding of longer-term assets is inherently unstable, especially in the presence of information and coordination problems. It can be rational for a funding provider to supply funds on a short-term basis, reasoning that it can exit if there is any uncertainty over the firm’s continued ability to roll over its funding from other sources. But, if the use of short-term funding becomes sufficiently widespread, the firm’s roll-over risk increases. In this situation, there is a strong incentive for each lender to “run” early if there is any uncertainty that could undermine the borrower’s ability to continue to roll over its funding from other sources.