BOE Officials' Views Varied on Bulking Up Capital Buffer

  • Says decision for no change in Dec. achieved by consensus
  • Some members said it was too soon to increase buffer level

Bank of England financial stability officials expressed a range of views on the amount of capital that U.K. banks should set aside and said they may vote on the level in the future.

Some of the 10-member panel said it was “too soon” to increase the countercyclical capital buffer, according to the record of the latest meeting of the Financial Policy Committee, led by Governor Mark Carney. “Though overall credit growth had increased it remained below that of nominal gross domestic product and below pre-crisis averages,” the record showed.

Others saw a case for an increase “soon” to allow a gradual increase of the buffer. “With credit availability continuing to improve and banks sufficiently profitable to be able to build capital through retained earnings, there could be scope for capital buffers to increase,” the record said.

While the panel achieved its decision to leave the buffer rate at zero by consensus, they disagreed on the timing of increases. The FPC said on Dec. 1, when it also presented the results of its latest stress tests of U.K. banks, that it intends gradually to increase the buffer to 1 percent, starting as soon as March.

Future Vote

“The discrete nature of the decision on the countercyclical-capital buffer might not always lend itself to a consensus-based process,” the record of the meetings held on Nov. 25 and 30 said. The committee “acknowledged that there would usually be a range of views” on the appropriate setting.

The record showed officials discussed a wide range of issues, including Greece, where they said “a sustainable solution would probably require an agreement on debt relief.” They also discussed the impact of last month’s Paris terrorist attacks and said it was unclear how economic activity would be affected.

FPC officials saw a risk of volatility in capital flows as central banks diverged in their policy settings. The market reaction to any decision by the U.S. Federal Reserve to tighten policy “remained difficult to predict,” officials said.

The FPC also discussed the potential for large-scale asset sales by open-ended investment funds to disrupt the market, identifying three channels.

While the most material risks were likely to come from end-investors and fund managers seeking to do the same thing at the same time, the FPC also noted that funds would be able to build up leverage by using derivatives “as part of more complex investment strategies.”

‘Exceptional’ Tools

Its lack of a standardized measure of how leverage is building across funds means the FPC is unable to fully assess the risks, it said. The Financial Conduct Authority is consulting on standardizing derivatives reporting, the FPC said.

The FCA is also planning a market study to assess whether investors understand the risk they may be unable to withdraw their money from funds in a crisis if “exceptional liquidity management tools” are used, the FPC said. These are designed to penalize or prevent a rush to redeem.

The FPC also said it supported the “appropriate use” of stress testing by funds to gauge their readiness to meet redemptions in stressed conditions, and backed the BOE’s plan to look into how funds could be incorporated into system-wide stress testing.

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