Bank of England Justifies Reduction in Capital Requirements Amid Criticism

Bank of England's Capital Requirement Decision

LONDON, Jan 20 (Reuters) - Bank of England Governor Andrew Bailey on Tuesday defended the central bank’s decision to cut headline bank capital requirements to 13% in December, rejecting claims by former officials John Vickers and David Aikman that the move had weakened the financial system’s resilience.

Criticism from Experts

In a blog post on January 5, Vickers, a former BoE chief economist, and David Aikman, who worked on financial stability issues, said bank capital requirements should be higher not lower. 

Government's Stance on Regulation

The pair said: "the most likely practical effect of this weakening of resilience will be higher payouts to bank shareholders."

Impact on Lending and Economy

Bailey told lawmakers on parliament’s Treasury Committee that the decision to cut requirements by one percentage point reflected updated assessments of bank capital needs under incoming Basel 3.1 rules and because an expectation that UK lenders would become more systemically important globally has not materialised.

Taken together, the changes pointed to banks needing around one percentage point less capital, he said.

“Basel 3.1 is worth about half a percent off the sort of buffer that we maintain,” Bailey said.

“The UK banks have not become relatively more systemically significant. So again, there was half a percent put in, which really isn’t justified by what’s actually happened," he added. 

Higher bank capital requirements increase the buffer banks have against big losses and reduce the likelihood of them needing a taxpayer bailout in a crisis.

Prime Minister Keir Starmer and finance minister Rachel Reeves have said they want to reduce barriers to growth, including those they view as caused by excessive regulation.

At the time of the cut, Bailey said banks would hopefully use the surplus capital to increase their lending to boost the economy.

Bailey also on Tuesday defended the UK’s resolution regime which has been implemented since the financial crisis, saying its credibility justified allowing banks to hold less capital. Without that framework, requirements would be closer to 19%, he said.

Bailey said there was a “genuine difference of view” on the extent to which Vickers and Aikman believe the resolution regime can be relied on. “Obviously they're entitled to do that, but that's not our view,” he said.

(Reporting by Phoebe Seers; Editing by Susan Fenton)