Bank of England sets out plan to ease bank leverage rules
Bank of England Proposes Relaxation of Capital and Leverage Requirements
By Phoebe Seers and David Milliken
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.
Overview of Proposed Changes
The BoE's Financial Policy Committee said it would soften the impact of the leverage ratio, which requires lenders to hold a minimum ratio of capital against total assets, and announced work to enhance the usability of capital buffers so that they can be more easily released without automatically restricting payouts to shareholders.
However, some members of the FPC said they were concerned that the proposed changes "might lead to an unwanted increase in market-based leverage with implications for the resilience of core UK markets".
Background and Context
The FPC in December cut its estimate for the amount of capital lenders need to hold by one percentage point to 13%, the first such move since the financial crisis of the late 2000s.
It also initiated the review into the leverage ratio and buffers, which follows a relaxation of U.S. leverage requirements in November.
Leverage Ratio Developments
When the leverage ratio was introduced it was intended as a backstop to risk-weighted capital requirements, although the BoE said it has become binding for three out of seven major British banks and caused them to have higher obligations than international peers.
The central bank said it would remove the Countercyclical Leverage 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.
Industry Response
The Association for Financial Markets in Europe, representing large banks, said it welcomed the changes.
"The (leverage ratio) framework incorporates significant gold-plating and has become increasingly binding. Addressing these issues requires more than incremental adjustment so we are pleased to see that the FPC and PRA will consult on a package of measures," Jeanie Watson, AFME's director for capital and risk management, said.
Risks Highlighted in Financial Stability Report
In its latest Financial Stability Report, also published Tuesday, the BoE highlighted growing risks to the financial system from increased borrowing to finance share purchases, cybersecurity threats from artificial intelligence, and the extent to which investors and lenders were betting on the success of AI and tech companies.
Buffer Usability and Future Reforms
Buffer Usability
BUFFER USABILITY
The BoE said its work on buffer usability, which aims to reduce banks' incentives to restrict lending in a period of financial market 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
Looking ahead, 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, Editing by Catherine Evans)
