The Bank of England (BOE) plans to increase capital requirements for British lenders by ￡11.4 billion (US$14.5 billion) to tackle risks posed by rapid growth in consumer credit and to prepare for the uncertain outcome of Brexit talks.
The central bank set the countercyclical capital buffer at 0.5 percent of risk-weighted assets for British loans effective in June next year, and if nothing material changes the it plans to increase the level again to 1 percent in November next year.
Additionally, next month regulators are to publish new guidelines for consumer lending to ensure risks are priced and managed appropriately.
“We want to move the levels of capital back up to the level they should be — any time you move into more benign credit conditions there have been fewer defaults,” which can lead to complacency, BOE Governor Mark Carney said yesterday.
Regarding Brexit, “there are risks around that process, so contingency planning needs to be not only put in place, but also activated,” he added.
Each increase of 0.5 percent is to swell banks’ cushion of common equity Tier 1, the highest-quality capital, by ￡5.7 billion, according to the central bank’s Financial Stability Report. It opted for a staggered approach because it is less likely to result in banks tightening lending in response.
“It is a sensible way for the bank to try to take some of the steam out of the consumer debt growth without immediately impacting the nominal rates paid by mortgage borrowers,” Edinburgh-based Baillie Gifford & Co investment manager Gregory Turnbull Schwartz said. “It’s more targeted than a general base rate hit and more easily reversed should they see the need to do that in the near term.”
The countercyclical capital buffer is meant to guard against banks’ tendency to boost lending in boom times and slash it in a bust, potentially exacerbating a slowdown. The regulation is meant to ensure banks have enough capital to weather losses and continue making loans to support the economy.
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