The Bank of England’s (BoE’s) Financial Policy Committee (FPC) has revisited its assessment of the appropriate capital requirements for the banking system from the perspective of the costs and benefits to growth. FPC judged that the appropriate benchmark for the system-wide level of Tier 1 capital requirements is now 1% lower at around 13% of risk weighted assets (RWAs) – equivalent to a Common Equity Tier 1 (CET1) ratio of around 11%.
“This 13% benchmark for Tier 1 capital requirements comprises an underlying optimal level of 11%, inclusive of the neutral rate for the UK countercyclical capital buffer (CCyB), and an additional 2% to account for outstanding gaps and shortcomings in the measurement of RWAs. Pillar 2A minimum requirements, which capture such gaps and shortcomings, mean that UK banks have capital for risks such as interest rate risk in the banking book, the importance of which was highlighted by the failure of Silicon Valley Bank in 2023,” according to the report.
Other issues the FPC flagged in the full report were gilt repo market reforms, including clearing, future leverage ratio changes and the introduction of private market stress tests.
In addition, the Basel Committee for Banking Supervision (BCBS) reported on the implementation of Basel II global standards in the UK. Assessments find the UK regulations largely compliant with Net Stable Funding Ratio standard and large exposures framework, and BCBS has started the jurisdictional assessment of Basel III revisions to risk weighted assets and the leverage ratio.
“The UK’s implementation of the Net Stable Funding Ratio (NSFR) standard and large exposures framework (LEX) was assessed as largely compliant with the global standards set by the Basel Committee, which is one notch below the highest overall grade,” the BIS wrote in a statement.