In addition to the previously noted fireworks from Mario Draghi, also on Tuesday the Bank of England ordered banks to build greater capital cushions in the coming months to protect the U. K. financial system from risks ranging from Brexit to China to booming consumer borrowing. In its twice-annual financial stability report, the BOE’s Financial Policy Committee said that there are ‘pockets of risk’ in the financial system, and to address them the BOE set the countercyclical capital buffer at 0.5% of risk-weighted assets for U. K. loans effective in June 2018, and if nothing material changes the central bank plans to increase the level again to 1% in November.
Each increase of 0.5 percent will swell banks’ cushion of common equity Tier 1, the highest-quality capital, by 5.7 billion pounds, according to the BOE’s Financial Stability Report. The BOE opted for a staggered approach because it’s less likely to result in banks tightening lending in response.
Additionally, next month regulators will publish new guidelines for consumer lending to ensure risks are priced and managed appropriately.
‘We want to move the levels of capital back up to the level they should be — any time you move into more benign credit conditions there have been fewer defaults,’ which can lead to complacency, Governor Mark Carney said on Tuesday. Regarding Brexit, ‘there are risks around that process, so contingency planning needs to be not only put in place but also activated.’
This post was published at Zero Hedge on Jun 27, 2017.