Former Officials Critique Bank of England's Capital Requirement Changes

Critique of Capital Requirement Changes

LONDON, Jan 15 (Reuters) - The Bank of England has made a mistake by lowering capital requirements for banks which is likely to enrich shareholders at a time when risks to the finance sector are on the rise, two former BoE officials said on Thursday.

John Vickers, a former BoE chief economist who also oversaw a bank rules reform after the global financial crisis, and David Aikman, who worked on financial stability issues at the central bank, said bank capital requirements should be higher not lower.

The BoE's Financial Policy Committee last month lowered its system-wide capital requirements by 1 percentage point. Governor Andrew Bailey said banks would hopefully increase their lending to boost the economy as a result of the change.

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.

Implications for Lending and Growth

But Vickers and Aikman said the effects of the change on lending and growth were likely to be small while bank payouts to shareholders might rise.

"We see no compelling economic reason for the FPC's loosening of bank capital policy. On the contrary, the Bank of England might have made a capital mistake," they wrote in a blog posted by the Centre for Economic Policy Research, a think tank.

Higher risks facing the financial sector - including from the trade policies of U.S. President Donald Trump - and the reduced ability of Britain's fiscally stretched government to bail out any struggling banks pointed to a need for higher capital requirements, they said.

Risks and Regulatory Pressures

"Political and lobbying pressure to relax this key element of regulation should, in our view, have been resisted," Vickers and Aikman said.

Historical Context and Expert Opinions

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.

The BoE said in December that its decision to lower the system-wide level of Tier 1 capital requirements to 13% of risk-weighted assets was backed up by changes in the financial system including a fall in banks' average risk weights, reduced systemic importance of some banks and better risk measurement.

Vickers, who has long called for higher bank capital requirements, is currently the warden of All Souls College, part of the University of Oxford. Aikman is director of the National Institute of Economic and Social Research, a think tank.

(Writing by William Schomberg; Editing by Toby Chopra)