Bank of England Sets New Buffer Requirement for U.K. Lenders

  • BOE says rule implies ‘only very small’ capital increase
  • Systemic risk buffer aims to ensure banks can lend after shock

Lloyds Banking Group Plc, Nationwide Building Society and other major U.K. retail lenders face new regulatory-capital requirements as the Bank of England moves to ensure the industry can keep credit flowing under stress.

The central bank’s Financial Policy Committee on Thursday said it set the so-called systemic risk buffer at zero percent for lenders with total assets of less than 175 billion pounds. The level rises in increments of 50 basis points to as much as 2.5 percent of risk-weighted assets for the largest firms currently. The requirements will have “only a very small increase in capital at the system-wide level,” the BOE said, releasing the final version of the regulation.

The buffer, which will be applied starting in 2019, is intended to beef up banks’ resilience and reflects the economic damage that would be caused if they curtailed lending. It affects building societies and consumer units separated from investment banking behind the so-called ring-fence with at least 25 billion pounds in deposits from individuals and small businesses.

“The Committee’s views on capital are grounded in the need to ensure that the banking system can serve the real economy in both normal and stressed conditions,” BOE Governor Mark Carney said in a letter to Chancellor George Osborne. “The FPC has provided greater clarity on its expectations for the appropriate level of capital for the U.K. banking system.”

U.K. Implementation

The requirement is part of the U.K.’s 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.

The systemic risk buffer has been designed to allow smaller banks to compete with incumbents without facing an immediate extra cost, the BOE said.

Ring-Fencing

These banks will be able to use that buffer to fund some or all of the equity buffer in their ring-fenced operations, the BOE said. A lender that in 2019 finds itself with a large U.K. ring-fenced bank and a low global systemic risk buffer requirement may have to raise some equity to ensure the domestic buffer doesn’t subtract from the group requirement, according to the BOE.

The Prudential Regulation Authority will consult on the implementation of this requirement, the BOE said.

Like the separation of retail and investment banking, the systemic risk buffer was a recommendation of the 2011 Independent Commission on Banking, chaired by John Vickers, and is part of regulators’ attempt to address the vulnerabilities of the system as a whole that was adopted after the 2008 crisis.

The BOE has come under fire from Vickers for watering down his proposals on ring-fencing and capital. He wrote in February that the BOE was proposing “substantially milder equity requirements for British banks” than did his commission. More effective resolution arrangements aren’t a substitute for adequate loss-absorbing capacity, he wrote in his submission to the BOE’s consultation.

“It’s disappointing that the BOE has stuck to its soft policy on bank capital,” Vickers said by e-mail today. “Parliament gave the BOE scope to strengthen capital requirements a good deal further, but it has fallen short.”

Vickers’s Recommendations

Carney says the BOE has exceeded the Vickers commission’s recommendations.
The BOE sees the appropriate Tier 1 capital requirement for the system as a whole at about 11 percent of risk-weighted assets, compared with the Vickers commission’s recommendation of 10-plus percent. The systemic risk buffers are part of that total requirement.

While the regulator set the rate for the largest lenders at 2.5 percent initially, the top rate could rise to 3 percent for firms that increase assets beyond 755 billion pounds. This aims to discourage the largest banks from getting even bigger.

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