Bank of England Boosts Capital Rules for Big Retail Lenders

Lloyds Banking Group Plc and other big U.K. retail lenders face new regulatory capital requirements as the Bank of England moves to bolster the industry’s ability to withstand shocks without hurting the economy.

The central bank proposed rules for imposing a systemic risk buffer on large banks and building societies to ensure they can maintain “critical financial services” to the economy even when they’re under extreme stress. The capital requirement will be applied in 2019.

The buffer, which must be met with the highest quality capital, will be set at zero percent for lenders with less than 175 billion pounds ($250 billion) of total assets, rising to 2.5 percent of risk-weighted assets for the biggest firms. That equates to an increase of about 0.5 percent in equity requirements for the U.K. financial system in aggregate, though the impact may be greater on specific firms, the BOE said on Friday.

“The financial crisis demonstrated the long-lasting damage that can be caused when large banks become distressed and have to cut back lending to the economy,” BOE Deputy Governor Jon Cunliffe said in a statement. “These proposals are intended to reduce risk of this happening again.”

The buffer applies to lenders -- building societies and retail bank units separated from investment operations behind the so-called ring-fence -- with at least 25 billion pounds in deposits from individuals and small businesses. The total-asset threshold is designed to allow new, smaller banks to enter the U.K. market without immediately facing an additional regulatory burden, according to the BOE.

Global Surcharge

About 80 percent of lending in the U.K. is provided by firms that currently have at least 200 billion pounds of assets, the BOE said.

The requirement is part of the U.K. implementation of global measures intended to tackle too-big-to-fail banks. The four biggest U.K. banks -- Barclays Plc, Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Standard Chartered Plc -- already face a capital surcharge at the group level to account for their global systemic importance.

These banks will be able to use that buffer -- as high as 2.5 percent -- to finance some or all of the equity buffer in their ring-fenced operations, the BOE said.
U.K. lenders are in the process of drawing up plans to meet the ring-fence requirement, which is meant to protect deposit-taking units if riskier divisions incur losses and need to be shut down.

Taxpayer Bailouts

The systemic risk buffer is one of the last elements of the U.K.’s broader plan to shore up the industry’s finances following the 2008 financial crisis, when lenders’ lack of capital to absorb losses prompted taxpayer bailouts.

Regulators have already moved to increase minimum capital requirements and have forced banks to issue debt that can convert to equity when a lender gets into trouble. The BOE sees the appropriate Tier 1 equity requirement for the system as a whole at 11 percent of risk-weighted assets. The systemic risk buffer is part of that total requirement.

While the regulator expects the largest lenders to have a 2.5 percent rate initially, it could raise the top rate to 3 percent if a firm expands relevant total assets beyond 755 billion pounds.

Affected firms will also be subject to an additional leverage ratio buffer rate set at 35 percent of the systemic risk buffer rate, the BOE said.

The regulator sees a net benefit from the buffer of as much as 0.8 percent of gross domestic product, which “will outweigh any impact on lending spreads,” it said.
The BOE will receive public comments until April and said it intends to complete the regulation in May.

“These new rules will mean that large U.K. banks and building societies are more resilient to adverse shocks, enabling them to continue to lend to households and businesses even in times of stress,” Cunliffe said.