BOE Ready to Use Countercyclical Buffer If Needed, Carney Says

  • Buffer would be at 1% in normal times and rise with risks
  • Banks must build up capital in good times to lend in bad

The Bank of England intends to make active use of the countercyclical buffer as the economy recovers and financial institutions take on more risk, Governor Mark Carney told lawmakers.

The Financial Policy Committee said in December that the end of post-crisis conditions meant it was “actively considering” the level at which it will set the countercyclical capital buffer. While it’s at zero percent currently, the FPC said it will review this at its March meeting.

“It is the intention of the FPC to actively use the CCB,” Carney told the Parliament’s Treasury Select Committee on Tuesday. The level would be set at 1 percent of assets weighted for risk in normal times, he said, “but if risk-taking were more advanced, extreme or aggressive, that would be higher and we would continue to move it up.”

The buffer is designed to ensure banks build up capital in the good times so that they can continue lending when the economy weakens. The buffer is in addition to the other capital firms must have to fund their activities and which currently total 13 percent to 13.5 percent of risk-weighted assets in the U.K., Carney said.

Banks already need to have some funds earmarked to lean against the economic cycle, which could be used to offset an increased countercyclical buffer, an increase of the countercyclical buffer doesn’t have to mean an increase in overall capital requirements, the FPC said.

In the latest report, the committee also said risks to financial stability caused by Greece had declined and been replaced by those emanating from emerging markets. Globally, asset prices are supported by record-low interest rates, making them vulnerable to sharp increases in market rates, the FPC said.

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