Bank of England reconsiders plans to hike banks’ capital buffer

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City Editor

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The FPC, which was established in 2013, monitors financial stability risks and tries to prevent those risks developing into threats to wider UK financial stability.
The FPC, which was established in 2013, monitors financial stability risks and tries to prevent those risks developing into threats to wider UK financial stability.

The Bank of England is reassessing plans to hike banks’ capital requirements in the second quarter of this year due to the financial shocks of war in Ukraine.

In a quarterly report from its Financial Policy Committee, the Bank said that lender’s capital levels remained strong but the volatility of the markets and strains of the war meant it may not be the right time to raise the requirements from banks.

“Global financial markets, particularly for commodities, have been volatile and uncertainty over the economic outlook has increased significantly,” the BoE said.

It added: “Given this uncertainty, the Committee will continue to monitor the situation closely and stands ready to vary the UK CCyB rate in either direction.”

Threadneedle street policy makers had previously intended to hike banks’ counter-cyclical capital buffer (CCyB) to two per cent, up from one per cent, in the second quarter of this year, but volatility in the global markets had now led it to reassess the situation.

The annual stress test of banks’ financial health, which had been suspended during the COVID-19 pandemic, will also now be delayed until later in 2022, the FPC said, due to the impact of the war.

Around one per cent of UK lenders’ core capital was exposed to Russia at the end of 2021, the FPC said, but the UK banking sector was in a strong position.

“The FPC has tested the resilience of the UK banking system against a range of severe economic scenarios, and remains of the view that major UK banks are able to withstand severe market and economic disruption,” it said.

It came as the Bank warned of the impact of rising energy prices and a cost of living crunch in the committee report today.

“An increase in the cost of living, partly due to rising energy and other import prices, is likely to affect household resilience across the income distribution, with a larger impact on lower income households that spend a greater share of their income on energy and other essential items,” the FPC said.