UK banks blast regulations for ‘penalising’ good risk management
Top lenders have laid bare their frustrations with UK banking regulation in a bombshell new report that urges the removal of “excessive conservatism”.
In response to the Bank of England’s review of capital requirements, the Association for Financial Markets in Europe (AFME) – which represents over 150 global banks, including the UK’s Big Four – warned that current rules are misaligned with actual risk.
The report blasts a regulatory regime that forces banks to hoard capital rather than intermediate efficiently across wholesale markets, which the AFME states is undermining the government’s growth ambitions.
The UK’s leverage ratio is a “clear instance of gold-plating,” the AFME said, that “penalises good risk management and creates incentives to invest in higher risk assets”.
The rule dictates at least three quarters of a bank’s tier one capital – a core measure of a firm’s ability to absorb losses – must be made up of the highest-quality regulatory capital, known as CET1.
The restriction has triggered contention among the industry giants, which argue those who lends money to unstable startups should not be held to the same standard as those holding only government bonds and cash.
“Banks and broker dealers becoming leverage constrained can have significant implications for their ability to support the UK economy,” the AFME said, as it urged the Bank’s Financial Policy Committee (FPC) to reconsider the leverage ratio in its review.
The AFME argued the “binding” leverage can lead to banks and broker dealers having to “shrink their balance sheets in response, or decrease their activity in certain areas,” and thus pumping less capital into the economy.
“The review is an important opportunity to improve the capital framework and enable the banking
sector to further support the UK economy by removing excessive conservatism, while maintaining
resilience,” the group added.
Banks ‘regret’ lack of regulatory progress
In December, the Bank of England said it would take the chop to rules around capital requirments following lobbying efforts from the banking industry body UK Finance, which claimed up to £54bn of extra capital has been racked up by the sector due to holding rules.
The FPC said it would shrink UK lenders’ capital requirements for risk-weighted assets that can absorb unexpected losses to 13 per cent from 14 per cent previously.
The fresh changes came after the UK’s top seven banks, Lloyds, Barclays, Natwest, Santander UK, Nationwide and Standard Chartered, breezed through stress tests with the conclusion the lenders were strong enough to continue lending through “a severe but plausible” economic shock.
But the AFME has blasted the change “does not represent a genuine easing of requirements”.
It added its members “regret” the “lack of progress” in the improvement of regulation in the UK and Europe, noting that “no concrete policy proposals” have been published despite years of talk.
Rachel Reeves unveiled her Leeds Reform package intended to “rewire the financial services industry” in July this year. Whilst the moves were cheered by industry bigwigs at the time, analysts have raised concerns the changes will fail to make material difference across the sector.
Simon Ainsworth, banking analyst at Moody’s Ratings, told Morning Wire the package was “not really going to be moving the dial to a material extent for UK banks”.
He added: “They’re unlikely to be transformative, either for the banking system or as a driver for near term UK economic growth”.
Caroline Liesegang, managing director of Capital & Risk Management at AFME, said: “The FPC’s review is a crucial opportunity to modernise and future-proof the UK’s capital framework so it remains robust while better enabling banks to provide the lending, underwriting and market making activities that support households, businesses and the wider economy.”