London, United Kingdom. The Bank of England on Tuesday outlined plans to relax rules on how much capital banks must hold against shocks, seeking to bring requirements for British lenders closer to international standards. The proposals come as regulators globally face pressure to revisit requirements designed to strengthen resilience.
Proposed changes to capital framework
The Bank of England’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. It also announced work to improve the usability of capital buffers so they can be released more easily without automatically restricting payouts to shareholders.
The central bank said it would remove the Countercyclical Leverage Buffer from the leverage ratio and make a greater share of other buffers releasable. It estimated the changes would reduce leverage requirements for large British banks by 0.2 percentage points from their current level of a little over 3 per cent.
Concerns within the committee
Some members of the Financial Policy Committee 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”.
Context of the review
In December, the Financial Policy Committee cut its estimate for the amount of capital lenders need to hold by one percentage point to 13 per cent, the first such move since the financial crisis of the late 2000s.
It also launched the review into the leverage ratio and buffers following a relaxation of US leverage requirements in November.
Impact on British banks
When the leverage ratio was introduced, it was intended as a backstop to risk-weighted capital requirements. The Bank of England said it has become binding for three out of seven major British banks and has resulted in higher obligations than those faced by international peers.
The Financial Policy Committee said the proposed changes would make the framework “more proportionate and more effective by being better targeted”.
Industry response
The Association for Financial Markets in Europe, which represents 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,” said Jeanie Watson, AFME’s director for capital and risk management.