BOE to review bank capital rules for first time since 2019

The Bank of England will review the overall level of capital requirements it sets for banks for the first time since 2019 after officials determined that lenders have largely been able to keep an adequate cushion against hard times for much of the past decade.

The central bank will provide an update on that assessment in November, according to its twice-yearly Financial Stability Report published Wednesday. The Financial Policy Committee left the countercyclical buffer at 2% at its meeting on June 27.

“Considered over a longer time horizon, capital levels in aggregate had been broadly stable since the completion of the phase-in of the post-global financial crisis bank capital framework in 2019,” the minutes of their meeting said. While describing the level of capital currently as “broadly appropriate,” it was time to “refresh that assessment.”

With the review, the central bank would be joining many of its peers around the world in taking a look at their requirements for how much money banks have to set aside as cushion for hard times. That work has taken on more urgency following the election of US President Donald Trump, who has promised to usher in an era of deregulation for banks.

The FPC judged that U.K. lenders have the capacity to support households and businesses “even if economic, financial and business conditions were to be substantially worse than expected.”

Lessons learned

Sarah Breeden, the BOE’s deputy governor for financial stability, said the central bank’s upcoming review of capital requirements will allow the committee to incorporate lessons learned from more recent periods of stress.

“One of the things that’s happened since we last did a review is that we had the experience of the COVID pandemic and how the bank capital regime operated in that period of actual stress,” Breeden told reporters on Wednesday. “One of the things that we learned through that was that some of our buffers are more usable than others.”

Breeden noted the bank’s counter-cyclical capital buffer was more supportive of lending than those imposed by the Basel regime.

The committee also reviewed its policies that determine how easily banks can offer mortgages to lower-income borrowers who struggle to raise a down payment. Currently, less than 10% of mortgages are offered to applicants with a high loan-to-income ratio. That’s lower than the 15% aggregate limit imposed by the central bank, with officials noting lenders often leave a buffer to ensure they don’t breach that threshold.

The bank still believes that 15% limit is appropriate for the industry’s overall portfolio of home loans, though it has asked the Financial Conduct Authority and the Prudential Regulation Authority to work with banks that want to increase their share of lending at high LTIs for new applicants.

The committee recognizes that “in doing so, such high LTI lending by individual lenders could exceed 15% of their total number of new residential mortgages while the aggregate flow remains consistent with the 15% limit,” according to the report.

‘No intention’

Sam Woods, chief executive officer of the PRA, told reporters that the committee has “no intention” of reopening discussions on the U.K.’s adoption of so-called Basel 3.1, a slate of international bank capital rules that are scheduled to come into force in 2027.

Those rules have sparked consternation among banks around the world that have argued the higher capital requirements will limit their ability to extend credit to companies and households. The stricter standards would also dent their reserves for shareholder dividends and stock buybacks.

In the US, the Federal Reserve is widely expected to ease the requirements it will impose as part of the Basel regime. That’s caused banks across Europe to ratchet up their calls for their own regulators to ease the proposals in order to avoid putting them at a competitive disadvantage.

The FPC also said it’s supportive of a staff proposal that would explore allowing issuers of large stablecoins to earn a return on the assets backing them. Stablecoins are cryptocurrencies that aim to maintain a one-to-one value with another currency like the US dollar, supported by a reserve that’s usually filled with cash and cash-equivalent assets.

The BOE first outlined proposals to regulate stablecoins that reach systemic size in 2023, though officials have said no stablecoin in existence meets that benchmark today. The Financial Conduct Authority laid out its own proposals for smaller stablecoins earlier this year, with a regime expected to be in place in 2026.