Bank of England's Financial Policy Committee issues recommendations on capital rules

Record of FPC Meeting held on 19 March 2013
The interim Financial Policy Committee voted unanimously for the following six policy recommendations:

1. The Prudential Regulation Authority (PRA) should assess current capital adequacy using the Basel III definition of equity capital but after: (i) making deductions from currently-stated capital to reflect an assessment of expected future losses and a realistic assessment of future costs of conduct redress; and (ii) adjusting for a more prudent calculation of risk weights.

2. The PRA should take steps to ensure that, by the end of 2013, major UK banks and building societies hold capital resources equivalent to at least 7% of their riskweighted assets, as assessed on the basis described in Recommendation 1. Relative to that benchmark, major UK banks and building societies in aggregate currently have a shortfall in capital of around £25 billion.

3. The PRA should consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, where there are uncertainties about assets not covered in the FSA’s assessment of future expected losses or risk weights analysis, or where banks are highly leveraged relating to trading activities.

4. The PRA should ensure that major UK banks and building societies meet the requirements in Recommendations 2 and 3 by issuing new capital or restructuring balance sheets in a way that does not hinder lending to the economy. Any newlyissued capital, including contingent capital, would need to be clearly capable of absorbing losses in a going concern to enable firms to continue lending.

5. The PRA should ensure that major UK banks and building societies have credible plans to transition to meet the significantly higher targets for capital and the leverage ratio that will come into effect in 2019 after full implementation of Basel III, the trading book review and surcharge for systemically important banks, and after HM Government’s implementation of the ICB proposals, in ways consistent with sustainable expansion of the UK economy.

6. Looking to 2014 and beyond, the Bank and PRA should develop proposals for regular stress testing of the UK banking system. The purpose of those tests would be to assess the system’s capital adequacy. The framework should be able to accommodate any judgements by the Committee on emerging threats to financial stability.

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