UK banks brace for £11.4b cap­i­tal de­mand from BOE

Tehran Times - - ECONOMY -

The Bank of Eng­land plans to in­crease cap­i­tal re­quire­ments for U.K. lenders by 11.4 bil­lion pounds ($14.5 bil­lion) to tackle risks posed by con­sumer credit growth and pre­pare for the un­cer­tain out­come of Brexit talks.

The BOE set the coun­ter­cycli­cal cap­i­tal buf­fer at 0.5 per­cent of risk-weighted as­sets for U.K. loans ef­fec­tive in June 2018. “Ab­sent a ma­te­rial change in the out­look,” the cen­tral bank will in­crease the level again to 1 per­cent in Novem­ber.

Each in­crease of 0.5 per­cent will swell banks’ cush­ion of com­mon eq­uity Tier 1, the high­est-qual­ity cap­i­tal, by 5.7 bil­lion pounds, ac­cord­ing to the BOE’s Fi­nan­cial Sta­bil­ity Re­port pub­lished on Tues­day. The BOE also pro­posed boosting the lever­age ra­tio to 3.25 per­cent of ex­po­sures ex­clud­ing cen­tral-bank re­serves.

This “mea­sured ap­proach is likely to de­crease the risk that banks ad­just by tight­en­ing credit con­di­tions, thereby min­i­miz­ing the cost to the econ­omy of mak­ing the bank­ing sys­tem more re­silient,” the BOE said.

The coun­ter­cycli­cal cap­i­tal buf­fer is meant to guard against banks’ ten­dency to boost lend­ing in boom times and slash it in a bust, po­ten­tially ex­ac­er­bat­ing a slow­down. The reg­u­la­tion is meant to en­sure banks have enough cap­i­tal to weather losses and con­tinue mak­ing loans to sup­port the econ­omy.

‘Rapid growth’

In the im­me­di­ate af­ter­math of Bri­tain’s vote to leave the EU last June, the BOE re­versed a planned in­crease in the buf­fer to help stave off the U.K. slump that was pre­dicted by econ­o­mists. Since the ref­er­en­dum vote, the econ­omy has per­formed bet­ter than ex­pec­ta­tions, lead­ing BOE Gover­nor Mark Car­ney to sug­gest the cap­i­tal buf­fer could be in­creased.

The over­all risks from U.K. ex­po­sures are at “nei­ther par­tic­u­larly el­e­vated nor sub­dued,” ac­cord­ing to the BOE.

By the time the BOE con­sid­ers raising the buf­fer rate to 1 per­cent, it will be able to fac­tor in the re­sults of its 2017 stress test of ma­jor U.K. banks. Be­cause of the “rapid growth” in con­sumer credit in the last 12 months, the BOE will bring for­ward an as­sess­ment of stressed losses on this lend­ing to in­form its Novem­ber de­ci­sion on the buf­fer.

The BOE pre­vi­ously said raising the buf­fer is likely to tighten credit, with bank lend­ing spreads in­creas­ing by about 10 ba­sis points in re­sponse to a 1 per­cent buf­fer level in a “sta­ble” eco­nomic en­vi­ron­ment.

The in­crease of the min­i­mum lever­age ra­tio re­quire­ment to 3.25 per­cent from 3 per­cent is in­tended to re­store the “level of re­silience” de­liv­ered be­fore the FPC de­ci­sion to ex­clude cen­tral-bank re­serves from the mea­sure, the BOE said.

Stress test

The FPC also tight­ened stan­dards for mort­gage lend­ing, re­quir­ing banks to stress test bor­row­ers’ abil­ity to re­pay loans at three per­cent­age points above the stan­dard vari­able rate.

The BOE said as­set valuations on some cor­po­rate bonds and U.K. com­mer­cial real es­tate “ap­pear to fac­tor in a low level of long-term mar­ket in­ter­est rates, but do not ap­pear to be con­sis­tent with the pes­simistic and un­cer­tain out­look em­bod­ied in those ra tes.”

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