LONDON (REUTERS) - The Bank of England has signalled that it might raise for the first time the amount of capital that banks must set aside as extra protection against risks from future crises, saying lending was picking up as Britain's economy recovers.
The Bank's Financial Policy Committee discussed the possibility of raising the countercyclical capital buffer (CCB), which has been set at zero since its introduction in 2013, in smaller increments, according to minutes of a meeting last week.
"Given the challenging outlook for financial stability, with modest but rising credit growth and indicators that some domestic risks were beginning to re-emerge, it could be argued that the system was moving into a more normal phase of the credit cycle," the minutes, released yesterday on Thursday (Oct 1), said. "That should be reflected in the Committee's consideration of the appropriate CCB rate."
The BoE, along with central banks in other advanced economies, has overhauled the rules for the financial sector in the hope of preventing the kind of build-up of risks that caused the global financial crisis in 2007-09.
The CCB represents an extra level of protection on top of other requirements for lenders to set capital aside. The buffer is supposed to help banks build up a cushion of capital in periods of economic normality to make them less exposed to crises in the future.
The FPC said it was awaiting the results of this year's stress tests of Britain's biggest lenders, due to be published on Dec. 1, to gauge the robustness of the financial sector. "The Committee noted that decisions regarding the CCB might have implications for existing firm-specific capital buffers, to the extent that these took cyclical risks into account," said the record of last week's meeting.
Thursday's statement is the clearest sign yet of how the BoE intends to use the stress tests as an ongoing supervisory tool to determine current and future capital levels at banks.
The FPC also said there was "potential for material impact on UK financial stability" due to the country's direct and indirect links to emerging markets including China. "Though risk had begun to be repriced, members judged that market prices might not yet sufficiently be factoring in the potential for a deterioration in liquidity conditions given changes in market functioning and elevated tail risks related to (emerging markets)," the minutes said.