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Bank of England imposes higher capital buffers on UK lenders

  • 29/03/2016
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Bank of England imposes higher capital buffers on UK lenders
Investor expectations that banks are suffering weaker profitability has prompted the Bank of England to increase the amount of capital that firms must set aside as a buffer.

In a policy statement from its most recent meeting, the Financial Policy Committee (FPC) said that from 29 March, 2017 UK banks and building societies will be required to hold 0.5% of risk-weighted assets on their balance sheet as part of a new requirement to ensure enough capital is held to withstand any shocks to the economy.

In December, the committee alerted the sector to its plans to introduce the so-called counter-cyclical capital buffer to the region of 1% in a standard risk environment. The buffer is designed to move up and down according to the Bank’s assessment of economic risks at the time.

But the Bank added that around three-quarters of all UK lenders are unlikely to see the impact of the changes as existing requirements, known as Pillar 2 supervisory capital buffers, will be reduced when the new requirement is phased in.

The FPC’s remit is to assess the outlook for financial stability by identifying risks faced by institutions and their ability to continue providing essential services, including the supply of credit, to the wider economy.

Since its last meeting in November 2015, the FPC noted that the outlook for financial stability has deteriorated. At the same time, it said that the resilience of the core banking system has improved but investor expectations of future profitability at banks have weakened, which threw their ability to build resilience in the future into question.

UK bank share prices have plummeted by around 15% since November last year, although the committee noted that this varied significantly according to banks’ varying expectations of performance.

The committee plans to gradually increase the capital buffer to around 1% as originally planned and will keep it under review each quarter.

The FPC’s announcement comes as the Prudential Regulation Authority laid out guidelines for affordability testing in buy-to-let lending, with specialist underwriting standards proposed for landlords with four or more properties in their portfolio.

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