Bank of England plans to make banks hold up to £10bn more capital
The Bank of England (BoE) set out plans on Tuesday to require banks to hold as much as £10bn extra capital as the credit cycle moves into a more normal phase, but stopped short of immediate action.
The central bank said credit conditions in Britain had largely recovered from the financial crisis as banks began to lend more freely, and warned that asset prices were vulnerable to a big rise in interest rates and emerging market risks.
"Following the global financial crisis, there was a period of heightened risk aversion and retrenchment from risk-taking," the BoE said. "The system has now moved out of that period."
The central bank said it now expected banks to hold a so-called counter-cyclical capital buffer (CCB) of 1pc during normal times, and was in the process of tweaking bank-specific requirements with a view to impose this step-by-step from March.
The CCB aims to rein in risky lending at frothier stages of the credit cycle. It stands at zero currently, but the BoE has already required some banks to hold extra capital due to firm-specific risks. Some economists and banking analysts had expected the BoE to raise the CCB this month to 0.5pc.
The BoE also said it expected the banking sector as a whole to hold high-grade tier one equity capital of 13.5pc of risk-weighted assets by 2019, up from 13pc now -- part of which would overlap with the capital required for the CCB.
The BoE has said it wanted to give banks more clarity about its long-run aims for the amount of capital they hold, now that credit conditions had largely got back to normal. Banks have complained that in the past, the BoE has unexpectedly piled on extra capital requirements, making it hard for them to lend or decide which lines of business to stay in.
Alongside its half-yearly Financial Stability Report, the BoE also released the results of annual 'stress tests' into how lenders would deal with unexpected economic shocks.
This year the focus was on emerging market and trading risks, and Royal Bank of Scotland and Standard Chartered both only passed thanks to steps they took to improve their capital ratios mid-way through the testing process.
The other five big lenders tested -- HSBC, Barclays, Lloyds Banking Group, Santander and Nationwide -- did not have to take action.
Asset managers will face tests next year of how they would deal with investors pulling out their money en masse.