The central bank will allow the main U.K. lenders to shrink required holdings of low-yielding, easy-to-sell securities, such as government bonds, once they hold capital reserves equivalent to 7 percent of their risk-weighted assets, Governor Mark Carney said today in his first policy speech since taking over from Mervyn King in July.
“The effect will be to lower total required holdings by 90 billion pounds ($139 billion), once all eight major banks and building societies meet the capital threshold,” Carney said at an event in Nottingham organized by the Confederation of British Industry. “That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy.”
The Bank of England said in June that five U.K. banks need to find an additional 13.4 billion pounds to meet tougher minimum capital requirements, including the 7 percent rule, set to take effect at the end of this year. Shares of the U.K.’s largest lenders, including Barclays Plc (BARC) and Lloyds Banking Group Plc (LLOY), surged after Carney’s speech today.
“It’s pretty much the first relaxation of the rules after the banks have been subjected to gold-plated regulation compared with their European and U.S. peers,” said Simon Willis, a banking analyst at Daniel Stewart Securities Plc (DAN) in London. This relaxation of the rules should improve profitability, he said.
The June warning from the BOE prompted Barclays, the U.K.’s second-largest bank by assets, to embark last month on a 5.8 billion-pound rights offering to bolster its financial resilience.
Barclays jumped as much as 1.4 percent in London after Carney’s speech. Lloyds advanced 1.7 percent and Royal Bank of Scotland Group Plc rose 1.8 percent.
Carney’s plan “offers significant upside” for lenders as they can swap the low interest paid on deposits at the central bank for the higher returns possible on new loans, Claire Kane, an analyst at RBC Capital Markets, said in a research note.
The effects of the BOE’s decision are “likely to emerge gradually” over the coming year, she said.
Lloyds, Barclays and RBS had combined liquid assets of 510 billion pounds at the end of June, according to RBC data.
Britain’s economic growth accelerated in the second quarter and the central bank and the Treasury are trying to spur lending to cement the recovery.
U.K. mortgage approvals declined in June and business lending fell, the BOE said on July 29, highlighting continued strains in credit markets. Lenders granted 57,667 home loans compared with 58,071 in May, the central bank said. Business lending fell by 1.3 billion pounds.
Carney’s relaxation of the liquidity rule contrasts with a suggestion by U.S. Federal Reserve Governor Daniel Tarullo earlier this year that regulators could ease bank capital requirements in exchange for lenders boosting their resilience to short-term financing squeezes.
Under Turullo’s proposal, flexibility would only be granted if a bank had a liquidity position that was substantially stronger than minimum requirements.
“The U.S. to date has taken the view that rules are minimums not to be transgressed regardless of stress, let alone policy rationales like hopes for higher lending,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. “With the BOE’s action, U.S. banks pushing back against this approach have an important ally, in effect, if not by intent.”
Global regulators have overhauled capital and liquidity regulations for lenders in the aftermath of the 2008 financial crisis.
The Basel Committee on Banking Supervision, which brings together regulators from 27 nations including the U.K., U.S. and China, earlier this year revised a draft liquidity rule for lenders that is set be phased in starting in 2015, and to fully take effect by Jan. 1, 2019.
That rule, known as a liquidity-coverage ratio, requires banks to hold enough easy-to-sell assets to survive a 30-day squeeze on their ability to obtain funding.
The Prudential Regulation Authority, the unit of the BOE responsible for bank oversight, said that the plan announced by Carney today would still require banks to hold liquid assets equivalent to 80 percent of what they would need to meet the Basel rule in 2019.
The PRA said that it would consult on how to adapt its rules to the Basel standard once the European Union has finished its deliberations on how to apply the international measure.
While Carney’s announcement today was targeted at large U.K. lenders, the PRA is working on “broadly similar” plans for smaller banks and building societies, the regulator said.
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