BOE cuts banks’ benchmark capital requirements ahead of review

The Bank of England has cut its estimate of how much capital the UK’s banking sector needs for the first time in a decade, and signalled a consultation that could free up extra lending and higher payouts to shareholders.

In a pre-market announcement on Tuesday (Dec 2), the central bank said it now believes that the UK banking system should have Tier 1 capital equal to around 13 per cent of risk-weighted assets. The last estimate, which dates to 2015 and was affirmed in 2019, was 14 per cent.

“Given the reduction in the Financial Policy Committee’s (FPC) benchmark, banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses,” the BOE said in a statement, as it noted the changes that had made the banking sector more resilient.

The UK will now consult on a series of measures, including:

• Reviewing the implementation of the leverage ratio, specifically the UK’s approach to regulatory buffers in leverage ratio requirements.
• The indexation system that leads to banks attracting higher requirements as they grow
• Ways to make banks’ capital buffers more usable
• The interaction between various capital buffers

Lobbyists from UK Finance had urged the BOE to take a “bold and strategic” approach to the capital reset to preserve competitiveness as the US slashes rules for its banks and the EU weighs changes.

“The FPC and Prudential Regulation Authority (PRA) are interested in the views of a broad range of stakeholders – including UK lenders, think-tanks, industry groups, investors, and academics – on the material covered in this paper, and welcome feedback and evidence on the issues identified for further assessment,” the BOE said in a statement. The PRA is the BOE’s regulation arm.

SEE ALSO

The initiative follows recent warnings from Bank of England governor Andrew Bailey about “alarm bells” ringing in the private finance sector, with platitudes offered by industry reminiscent of complacency over the quality of subprime debt before the financial crisis. BLOOMBERG

Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.