Bank of England Announces Plans to Relax Leverage Rules for UK Banks
By Phoebe Seers and David Milliken
Bank of England's Proposed Changes to Capital and Leverage Requirements
Overview of the Announcement
LONDON, July 7 (Reuters) - The Bank of England on Tuesday set out plans to relax rules on how much capital banks have to hold against shocks, aiming to align requirements for British banks more closely with international standards as regulators globally come under pressure to revisit requirements aimed at shoring up resilience.
Details of the Planned Reforms
Enhancing Capital Buffer Usability
The BoE's Financial Policy Committee announced work to enhance the usability of capital buffers so that they can be more easily released without automatically restricting payouts to shareholders and also said it would soften the impact of the leverage ratio, which requires lenders to hold a minimum ratio of capital against total assets.
Softening the Leverage Ratio
The central bank's move to soften leverage rules and other buffers follows a relaxation of U.S. leverage requirements in November, a development that increased competitive pressures for British lenders.
Impact on Major British Banks
Current Leverage Ratio Effects
When the leverage ratio was introduced it was intended as a backstop to risk weighted capital requirements, though the BoE said it has become binding for three out of seven major British banks and caused them to have a higher obligations than international peers.
Estimated Reduction in Requirements
The BoE said it would remove one buffer from the leverage ratio and make a greater share of other buffers releasable among proposed changes, estimating a 0.2 percentage point reduction in leverage requirements for large British banks, which currently stand at a bit over 3%.
The changes would make the framework "more proportionate and more effective by being better targeted," the FPC said.
Implications for Domestic and International Banks
Focus on Domestically Focused Banks
The BoE also said its work on buffer usability, which aims to reduce banks' incentives to restrict lending in a stress, would only impact large, domestically focused banks like Lloyds, NatWest and Santander UK, as rules for international banks are set by Basel. As part of that package, which will be subject to public consultation later in the year, banks will be given multiple years to rebuild buffers.
Vision for a Single Releasable Buffer
The FPC said to reduce complexity and further enhance buffer usability, it sees a clear case for a single buffer that is releasable in stress, which could only be achieved with international support.
"The FPC will work with the (Prudential Regulation Authority) and international authorities to pursue broad reform of the capital buffer framework and move towards this vision," it said.
(Reporting by Phoebe Seers and David Milliken)
