Bank of England raises capital requirements for UK banks by $14.5 billion

27 Jun 2017 01:17 PM

By CNBC : The Bank of England has told British banks to rise capital requirements for banks in case of an economic downturn.
British banks will have to increase their capital buffers by 11.4 billion pounds ($14.5 billion) to protect them from economic risks related to Brexit and growing consumer credit.
"The Financial Policy Committee (FPC) is increasing the U.K. countercyclical capital buffer (CCyB) rate to 0.5 percent, from 0 percent," the bank said in its latest financial stability report on Tuesday.
"Absent a material change in the outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC expects to increase the rate to 1 percent at its November meeting," the bank added in the report.
The bank had chosen last year to reduce the capital requirements for banks to allow them to borrow more to households and firms – a measure aimed at keeping the economy floating amid the uncertainty on the country's future trade relations with the EU.
However, the financial committee noted that there are several risks both domestically and external calling for precaution.
"Risk levels in some sectors are more elevated, notably so in the consumer credit market," the bank said.
"Global risks — which could influence the risks on UK exposures indirectly via their potential effects on U.K. economic growth — are also judged to be material, as are risks from some asset valuations. The FPC's measured approach is likely to decrease the risk that banks adjust by tightening credit conditions, thereby minimizing the cost to the economy of making the banking system more resilient," the BOE said.
Brexit contigency plans
The Bank of England has also flagged risks to the country's decision to leave the European Union and is said to be preparing for a number of potential scenarios, including one in which there's no agreement between London and Brussels.
"The FPC is focused on scenarios that, even if they may be the least likely to occur, could have most impact on U.K. financial stability. This includes a scenario in which there is no agreement in place at the point of exit. Such scenarios are where contingency planning and preparation will be most valuable," the BOE said.
The institution led by Mark Carney is concerned that if European firms aren't allowed to keep trading in the same manner, the flow of new banking and insurance services in the U.K. will be disrupted.
"Around 10 percent of the outstanding stock of loans to private non-financial corporations in the United Kingdom is extended by U.K. branches of EEA (European Economic Area) banks. Around 7 percent of general insurance contracts undertaken in the United Kingdom and 3 percent of life insurance contracts are written by EEA insurers. As well as disrupting new business from these providers, fragmentation could require the existing contracts to be transferred to a U.K.-authorized firm in order to address any legal uncertainties as to the status of, and ability to perform, such contracts," the BOE noted.

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