Bank of England requires banks to hold extra £11.4bn in capital

The Bank of England has raised its requirements for the amount of cash British banks have to hold as it looks to build up capital buffers against a financial system shock.

Presenting the biannual Financial Stability Report, governor Mark Carney warned of growing “pockets of risk that warrant extra vigilance” in the UK economy that could threaten the financial system.

Some lenders are not doing enough to prepare for a crisis, and are in danger of "forgetting the lessons of the past" by lowering underwriting standards, Carney warned.

British banks will be forced to hold another £11.4bn within 18 months as the countercyclical capital buffer rises first to 0.5 per cent of bank assets and then to one per cent in November.

Banks will have a year to build the initial £5.7bn buffer just announced, and 18 months for the second slice, barring any shocks to the economy. Carney added that he expects most banks to already have enough capital to fulfil the heightened requirements.

The countercyclical capital buffer first came into effect in March 2016, but it was lowered to zero per cent in the aftermath of the Brexit vote last year as the Bank predicted a sharp hit to the UK economy and a possible tightening of the supply of credit.

Since then the economy has performed more strongly than the Bank predicted, with it now judging it can raise capital requirements to prepare for the next shock.

Risks to UK financial stability have been downgraded from "elevated" to a “standard level”, according to the Financial Policy Committee, the Bank of England body responsible for monitoring the resilience of the financial system.

However, the Bank has its eye on lending to consumers, which has undergone a boom in the last few years to reach £198bn in April. Although consumer credit only accounts for 10 per cent of lending to UK borrowers, it is responsible for a far higher proportion of banking sector losses.

Banks may be basing their calculations on the current benign environment will continue indefinitely, rather than preparing for the worst, the FPC said.

Meanwhile the FPC has acted to tighten the affordability tests on mortgages. Lenders will now have to ensure their customers can afford a rise in interest rates they pay to around seven per cent.