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Investing.com -- U.K. banks could see significant profit boosts if the Bank of England raises the Minimum Requirements for Own Funds and Eligible Liabilities (MREL) thresholds in the coming days, according to RBC on Tuesday.
The potential announcement might come either in the Bank of England’s Financial Stability Report on July 9th or during the Chancellor’s Mansion House speech on July 15th, when she plans to unveil her Financial Services Growth and Competitiveness Strategy.
MREL requires banks with assets above certain thresholds to maintain minimum levels of equity and eligible subordinated debt that could be used for bail-in should the institution fail. The current threshold stands at £15-25 billion in assets.
In the fourth quarter of 2024, the Bank of England launched a consultation proposing to increase this threshold to £20-30 billion to reflect nominal GDP growth since the last review.
However, banking executives have described this proposed increase as disproportionately small.
If the threshold were to be raised further to £30-40 billion, Metro Bank (LON:MTRO) could see profit before tax benefits equivalent to approximately 20% of its fiscal year 2027 adjusted profit before tax. OSB Group could experience an 11% boost.
RBC has removed its Speculative Risk rating for Metro Bank, reduced its cost of equity by 2 percentage points, and increased its price target to 150p.
For Paragon Banking Group PLC (LON:PAGPA), which currently has £19 billion in assets and sits within the current MREL range but doesn’t have to comply, a meaningful increase in the threshold would provide additional growth flexibility, both organic and inorganic.
Close Brothers (F:CBRO) Group, with £14 billion in assets, is currently too small to be captured by MREL requirements.