Bank of England to adjust rules on capital for British lenders

The Bank of England (BoE) to adjust the rules on how much capital British banks must hold, to allow them to keep lending in an economic crisis.  The BoE said its plans would leave the average amount of capital that lenders need to hold broadly unchanged, but would allow it to vary more during the course of an economic cycle.

“These changes improve the responsiveness of capital requirements to economic conditions by shifting the balance towards buffers that can be drawn down as needed,” BoE Governor Mark Carney told a news conference.

Major British lenders currently hold so-called Tier 1 capital equivalent to just under 14% of risk-weighted assets on average. The BoE designates 1% of risk-weighted assets as a ‘counter-cyclical capital buffer’ (CCyB) during normal economic times, which can be used to support lending in a downturn. On Monday the BoE said it would double this buffer to 2%, to take effect by the end of 2020, and then lower other capital requirements by a similar amount.

This would allow major British lenders to absorb up to 23 billion pounds ($29.5 billion) of losses in a downturn without restricting lending, supporting up to 500 billion pounds of loans to British homes and businesses - the equivalent of five years’ borrowing.

Reuters reported last week that Britain’s mid-tier banks had asked the BoE to ease rules they say make it difficult for them to compete with the likes of HSBC, Barclays, RBS and Lloyds on an equal footing. The BoE said on Monday that when it consults on the detail of the CCyB changes, it would try to ensure they did not lead to any net increase in smaller banks’ capital requirements. For larger banks, the BoE said the changes would increase Tier 1 capital requirements by about 0.35 per centage points to just over 14%. STRESS TESTS PASSED Alongside this, the BoE said all of Britain’s seven main lenders passed an annual test of their ability to withstand financial and economic shocks for the second year running.

The BoE tested HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland, Standard Chartered, Santander UK, and Nationwide Building Society for their ability to withstand financial market stresses. The BoE said no lender failed to meet a firm-specific hurdle for the minimum amount of capital at the end of the test, in a repeat of last year’s result on a test that was similar in toughness. “UK banks are well above capital required hurdle rates and as a result, capital distributions through dividends and stock buybacks should increase,” said Fernando de la Mora, managing director at business consultants Alvarez & Marsal. All the banks in the stress tests said they would not need to find fresh capital as a result of the tests.

The BoE said Barclays and Lloyds would need to convert some of their AT1 capital into equity during a stress scenario, if new accounting rules that fully take effect in 2023 were applied. The BoE had already said lenders held enough capital to cope with the harshest form of Brexit, though a cliff-edge departure that would severely damage the economy now looks off the table for Jan. 31. Britain’s newly re-elected government has a comfortable majority to push through a divorce settlement that will see Britain leave the bloc at the end of next month and enter an 11-month transition period that lasts until the end of 2020.

Britain’s mid-tier banks have asked the Bank of England to ease rules introduced after the financial crisis that they say hamper their efforts to compete with bigger rivals that have a tight grip on the market.

Four banking industry sources said these so-called “challengers” have stepped up lobbying in meetings with the central bank and finance ministry officials in recent months to ease requirements for holding special debt aimed at shielding taxpayers from bailing out troubled banks.

Smaller banks have long-argued that rules are stacked in favour of the “big six” lenders - RBS, Lloyds, Barclays, HSBC, Santander and Nationwide. These same six have held 70% of the mortgage market since 2009, according to data from UK Finance.

The challengers also sense an opportunity emerging to secure changes from pending reviews of some rules next year, and Brexit triggering a fundamental look at regulation to ensure London remains a competitive global financial centre, the sources said.

The Bank of England has acknowledged mid-tier lenders could be facing “barriers to growth” as efforts so far to boost competition has not led to much change in the market dominance of the big six. BoE Deputy Governor Sam Woods signalled in October he was listening and wanted to do more to help, but he angered bankers by announcing only specific action to help credit unions, a tiny sector.

Reuters