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BoE may force banks to use buffers in a crisis, official says
Global Banking & Finance Review®
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By Huw Jones
LONDON (Reuters) – The Bank of England may oblige all banks to tap their capital buffer and stop paying dividends in a crisis to avoid a vacuum in lending to households and businesses, one of its senior officials said on Thursday.
Banks were reluctant to use up some of their capital buffers during extreme market volatility after economies went into lockdowns to fight COVID-19 in March 2020, an issue global regulators are already studying.
Banks were worried about stigma or market backlash given that tapping their capital conservation buffer (CCB) puts a halt on paying dividends, bonuses and coupons on some debt, said Victoria Saporta, the Bank of England’s executive director for prudential policy.
She proposed that in times of crisis, the BoE would force all banks to release their CCB at the same time, accompanied by a blanket ban on distributions in a combination that would avoid stigma and provide more predictability, Saporta said.
With London a base for many international banks, the proposal will be discussed with global regulators before any decision is taken, Saporta said.
“It needs to be worked out exactly how it happens,” Saporta told a BoE event.
Banks were also reluctant to go below the minimum threshold for their liquidity buffers of bonds for similar reasons, she said
“The regulatory messages in support of liquidity buffer usability communicated before and during the pandemic were on their own insufficient to address banks’ reluctance to use their liquid assets,” Saporta said.
The reluctance implied that central banks had to intervene in markets more quickly during the COVID-19 crisis, Saporta said.
“If we would like to change this, we may need to be bolder. One way to proceed would be to learn from our experience with capital buffers,” she said, adding there were “no silver bullets”.
“I feel that here, we might not have got the balance quite right: maybe the system is relying a bit more than is appropriate on central banks to jump in super quickly and in size,” Saporta added.
(Reporting by Huw Jones; editing by Bradley Perrett and Frank Jack Daniel)
A capital buffer is a reserve of capital that banks must hold to absorb potential losses and maintain stability during financial stress.
The capital conservation buffer is a regulatory requirement that mandates banks to hold a certain amount of capital above the minimum requirement to ensure they can withstand financial downturns.
Liquidity refers to the ability of a bank to meet its short-term financial obligations, which includes having enough cash or liquid assets to cover withdrawals and other liabilities.
Dividends are payments made by a bank to its shareholders, typically from profits, and can be suspended if the bank needs to conserve capital during a financial crisis.
Central banks are national institutions responsible for managing a country's currency, money supply, and interest rates, and they play a crucial role in maintaining financial stability.
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