UK banks are gearing up to supercharge the government’s growth agenda with reforms to lenders’ capital requirements set to unlock billions of free cash.
The Bank of England is set to take the chop to rules around capital requirements, as part of a “fresh up” of rules in a six-month review to be published on Tuesday.
It comes amid lobbying efforts from the banking industry body UK Finance, which has claimed up to £54bn of extra capital has been racked up by the sector due to holding rules.
As per a report from the central bank in 2015, the sufficient capital level for banks was set at 14 per cent.
This means 14 per cent of a bank’s risk-weighted assets must be funds that can absorb unexpected losses without putting customers or the financial system at risk.
Jonathan Pierce, equity analyst at Jefferies, expects a drop to 13 per cent in the coming review.
Reeves’ Leeds Reforms ‘untransformative’
The cash cushion is designed to protect a lender against shocks or economic turmoil.
This protective buffer is known as Common Equity Tier 1 (CET1) – consisting of bank funds that do not need to be repaid.
By reducing the required CET1 ratio, regulators would free up capital that banks can instead deploy through increased lending and power economic growth.
John Cronin, banking analyst at Seapoint Insights, has pencilled in a “full percentage point” reduction in the capital requirements.
Cronin also expects the review to bring a “more significant positive for the domestic listed banks than the Leeds Reforms”.
The Leeds Reform package was billed by Chancellor Rachel Reeves as her effort to “rewire” the financial services industry.
But the policies faced criticism for failing to move the dial, with analysts telling City AM the package was “unlikely to be transformative”.
Reeves has made big swings to please the banking sector in hopes of funnelling investment into the UK.
In her Autumn Budget – which considered a £26bn tax raid – banks were spared from a cash grab despite fierce lobbying. Over the 24 hours that followed JP Morgan, Lloyds Banking Group and Barclays announced a fresh injection of capital into the UK.
Bank bosses set to welcome shakeup
Capital requirements changes would be set to be welcome by the UK’s banking giants after top bosses sounded the alarm to lawmakers earlier this year.
“I think more in terms of looking at how we measure capital… I think that will put a competitive strain on UK banks in particular when you look at what’s happening in the United States,” Michael Roberts, chief executive of HSBC Bank, said in a House of Lords session.
“There’s already a difference today between the UK and US,” Roberts added, “I assume that will be a greater difference”.
The head of the banking watchdog warned against loosening lenders’ capital framework in a Mansion House address earlier this year.
Sam Woods, the head of the Prudential Regulation Authority (PRA), said requiring banks to no longer set aside capital for top-tier sovereign bonds would “be equivalent to ripping off our jacket, warm hat and gloves and throwing them all over the nearest cliff”.
A bank’s leverage ratio measures the stability of a firm through dividing its core capital by unweighted assets such as loans and bonds.
Should the bonds – often considered lower-risk – be removed from the calculation, it would require banks to hold fewer funds to cover its assets.
Woods said the move would be a “profound – and highly risky – change.”