(Nov 5): The Bank of England (BOE) is exploring ways of encouraging lenders to use more of their regulatory capital buffers in a bid to boost economic growth.
Sarah Breeden, the deputy governor for financial stability, told a conference in Spain on Tuesday that she wants to change “the approach to the buffers that the banks have” in order to release more capital for lending. The Bundesbank is investigating similar plans.
Breeden was addressing the issue of “management buffers”, the protective capital banks choose to hold above their regulatory requirements. She suggested lenders should feel able to draw down on their capital stack without fear of a supervisory response, such as a block on dividends.
Any change that would give banks the confidence to scrap their precautionary holdings could provide substantial economic support. Lenders hold an extra 0.5% to 1% of risk-weighted assets as management buffers, according to the BOE.
Getting rid of those self-imposed buffers could increase lending in the UK by £100 billion or more. When the BOE released its 1% counter-cyclical capital buffer at the start of the pandemic in March 2020 it calculated the move would “support up to £190 billion of bank lending to businesses”.
Parliament has given Britain’s financial supervisors a secondary objective to support competitiveness and growth. Breeden said she could “not underplay the importance” of the issue.
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She told Banco Santander SA’s “Urgency of Growth” conference that her “personal bugbear on this is buffers”. She added: “What we have seen is that we have a series of buffers that banks hold, some of which do not operate as buffers, they, in effect, just operate as minima.”
Of particular issue are the overarching “Basel combined buffers” rather than the BOE’s own 2% counter-cyclical top-up, which is applied above the requirements of the international Basel rules and can be removed in a crisis to support the economy, she said in July.
Discussions about how banks apply the rules are being held through the Financial Stability Board, which is chaired by BOE governor Andrew Bailey. Michael Theurer, a member of the executive board of Germany’s Bundesbank, criticised the “bewildering number of buffers” in a comment piece for the Financial Times in September.
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Breeden questioned whether the capital regime was “driving the right outcomes”. She added: “How can we think about changing the approach to the buffers that the banks have got? It’s not just simplifying. It’s changing the structure so that it can properly be used.”
The BOE is conducting a review of capital requirements, including the various buffers, which is due to be published in December.
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