BOE Defends Capital Rules That Make Banks Bear Cost of Risks

The Bank of England defended its capital rules, saying they ensure that banks bear the costs of taking risks, rather than the state.

Lenders “may prefer to operate with lower levels of financial resources than is socially optimal,” the London-based BOE, whose Prudential Regulation Authority unit took over bank supervision in April, said in a report published today.

“Prudential regulation seeks to address this problem by ensuring that credit and liquidity risks are properly accounted for, with the costs borne by the bank and its customers in the good times, rather than the public authorities in bad times,” according to the report, written by BOE and PRA officials Marc Farag, Damian Harland and Dan Nixon.

The Bank of England in June ordered the five largest U.K. lenders, including Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, to plug a 13.4 billion-pound capital shortfall by the end of the year. International banks have raised about $500 billion in capital in the aftermath of the financial crisis and fall of Lehman Brothers Holdings Inc. five years ago.

“We don’t believe that putting more capital into the system is detrimental,” Andrew Bailey, chief executive officer of the PRA, told Bloomberg Television this week. “A better-capitalized system, a more stable system, is good for financial stability, will be good for the banking system and good for the economy,” Bailey said.

‘High Cost’

Regulators have come under pressure to relax capital requirements.

“Adding layers and layers of conservatism may reduce the risk of future financial crises, but this comes at a high cost in terms of a permanent reduction on annual growth rates,” New-York based accounting firm KPMG LLP said in a report published yesterday.

The eight biggest U.K. banks by assets may need to boost their capital levels by 50 billion pounds ($79 billion) or shrink their balance sheets by 20 percent to meet tougher international rules in the future, KPMG said.

Global banks had core capital reserves averaging about 9 percent of their risk-weighted assets at the end of 2012, more than the 7 percent required under the updated standards, the Basel Committee on Banking Supervision said in a report last month. The minimum ratio of equity to debt, known as the leverage ratio, is 3 percent.

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