Bank of England eases bank capital requirements in bid to boost growth

By Lawrence White and Phoebe Seers

LONDON, Dec 2 - Britain's central bank on Tuesday cut the amount of capital it estimates lenders need to hold, making its first reduction to bank capital demands since the global financial crisis in a bid to boost lending and stimulate the economy.

The Bank of England said its capital framework review showed that the benchmark for Tier 1 capital requirements for lenders, set at 14% since 2015, could be reduced by 1 percentage point to 13%.

BoE Governor Andrew Bailey later said that the change in how much capital banks must hold to protect themselves against potential shocks reflected both "the evolution of the banking system and... (current) economic conditions".

He told a press conference he was not worried that lower capital requirements would help sow the seeds of the next financial crisis.

Banking executives and investors had expected some sort of an easing in recent weeks after earlier signals from central bank officials and as rival supervisors, including in the United States, prepare to soften their rules. Analysts described the BoE changes as important but measured.

In its half-yearly Financial Stability Report, the BoE also said it would launch a review on enhancing the usability of buffers and on the implementation of the leverage ratio, initiatives that could further ease requirements for lenders.

Shares in HSBC HSBA.L, Barclays BARC.L, Lloyds Banking Group LLOY.L and NatWest NWG.L rose between 1% and 1.5%, outpacing the broader market .FTSE.

The announcements came alongside the BoE saying the seven biggest lenders had all passed its stress tests that assess their resilience to severe macroeconomic and financial shocks.

WEIGHING COST OF CAPITAL AND NEED FOR GROWTH

The moves are the most concrete steps yet by British financial authorities to make good on a pledge to help boost economic growth, which the Labour government has said is a priority.

"We've seen what's going on in other jurisdictions and we want this jurisdiction to be competitive," Britain's financial services minister Lucy Rigby told a banking conference in London following the BoE's announcement.

Speaking to journalists, Bailey urged banks to use the freed-up funds to boost lending rather than reward shareholders.

Banking regulators worldwide raised capital requirements in the wake of the 2008 global financial crisis to ensure the system had better buffers to withstand liquidity crises, but industry bosses have argued in recent years that such reforms have served their purpose.

RBC Capital Markets analysts told clients the changes were "constructive for UK banks" but largely known and expectations for lower capital requirements elevated.

The fall in capital demands will come partly from the implementation in 2027 of global banking rules known as Basel 3.1, analysts noted.

TRUMP ADMINISTRATION SET TO EASE CAPITAL RULES

The Trump administration is expected to ease capital rules for the U.S. biggest banks, while the European Union is working on plans to simplify its prudential framework.

The new level of 13% for UK lenders comprises an underlying optimal level of 11%, plus 2 percentage points to account for outstanding gaps and shortcomings in measurement of risk-weighted assets, the BoE said.

The BoE's Financial Policy Committee (FPC) has been reviewing potential changes to the capital structure since July.

Following the easing, banks should have "greater certainty and confidence" to lend to UK households and businesses, the BoE said.

The FPC's review into the leverage ratio, which forces lenders to hold capital against total assets, will focus on how the rule works with ring-fencing and other measures, and whether it has become more restrictive as banks take on safer exposures.

Also on Tuesday, the BoE said it would set out this week more details of a stress test focused on the resilience of the wider financial system including fast-growing private markets.