Bank of England Discussed Faster Buildup of Capital Buffer

  • FPC reached consensus on setting buffer at 0.5% in March
  • Officials also discussed cyber risk, market liquidity

Bank of England financial-stability officials discussed increasing the countercyclical-capital buffer for banks at a more rapid pace to increase the resilience of lenders.

The majority of the Financial Policy Committee wanted to raise the buffer by 0.5 percent, while a minority pushed for a faster increase to 0.75 percent, according to the record of the meeting held on March 23. The panel said it would revisit the level after the U.K. votes on whether to remain in the European Union and when it has more information on the impact of tax changes in the buy-to-let market.

“Those members who initially favored moving to 0.75 percent were content to join a consensus that made clear that the setting of 0.5 percent was on a path to a setting of 1 percent,” the record of the meeting showed. The new level “would provide an additional buffer of capital that could be released quickly in the event of an adverse shock,” it said.

The countercyclical-capital buffer is one of the macroprudential tools the BOE gained after the 2008 crisis. The FPC said in December it will be increased gradually to 1 percent of assets weighted by risk, and the initial increase to 0.5 percent will be offset by reducing the level of another, non-public, buffer that varies from bank to bank.

Meaningful Level

Some FPC members underlined the advantage of setting the initial buffer rate closer to the 1 percent that is expected to be the normal level. The FPC’s ability to support lending in future by cutting the buffer depended on there being “a meaningful buffer of capital that could be released,” those members said. Because of the time lag in implementation -- the new rate doesn’t become binding until March, 2017 -- failure to move above 0.5 percent now would delay any gain in resilience, they said.

Members arguing for a 0.5 percent rate pointed to the possibility that the recovery in credit growth may not be fully established and might be curtailed by the expected slowdown in buy-to-let lending. There was also the possibility that rising uncertainty around the EU referendum might hinder lending growth, according to the record.

One member among the majority underscored the importance of not raising the buffer any further than would be offset by the reduction in current supervisory buffers, the record showed.

The committee also discussed levels of market liquidity, and “expressed a range of views on the balance between the potential benefits of liquidity and increased resilience,” the record showed.

On cyber risk, the committee said there “remained a significant threat to the resilience of the U.K. financial system.” The FPC would receive an update on work to review the authorities’ capabilities to manage and recover from a major attack by the summer.

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