Bank of England increases capital buffer rate in stress tests

The countercyclical capital buffer rate is designed to protect the banking sector from excess credit growth and the build-up of system-wide risk. The FPC announced plans for the variable countercyclical capital buffer rate in December.

The decision to change the rate was based on the deterioration in the outlook for financial stability in the UK since November 2015 when the committee last met, the FPC said.

"Some pre-existing risks have crystallised, drawing on the resilience of the system. Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum," the FPC said in its statement.

While the resilience of the core banking system has improved over this time, investor expectations have weakened and this could affect banks' ability to build resilience, the FPC said.

The committee has therefore decided to increase the rate to 0.5% from 29 March 2017, in a gradual move towards its target 'normal' rate of 1%.

However, the bank said around three-quarters of all UK lenders "will not see their overall regulatory capital buffers increase" as a result of the change, because the bank will simultaneously reduce existing supervisory capital buffers.

"Other banks will effectively have the period over which they must meet new requirements extended. This will be documented in a forthcoming statement by the PRA board," it said.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "This latest move illustrates the fluidity of the capital buffers based on the FPC’s risk assessment. It also highlights the importance of the FPC getting this right."

Financial services expert Michael Ruck, also of Pinsent Masons said: "The key test for those firms involved is whether their capital requirement will increase overall. The key test for the BoE is whether the new provisions increase confidence in accordance with its objectives or whether any changes are regarded as minor amendments to the overall stability of the UK banking system.

The countercyclical capital buffer rate will apply to all UK banks and building societies and to investment firms that have not been exempted by the Financial Conduct Authority.  Under European Systemic Risk Board rules, it will apply to branches of EU banks lending into the United Kingdom, the bank said.

The Bank of England also published plans for this year’s stress test of banks, designed to test how lenders would fare if global growth fell 1.9%, while UK GDP growth contracted 4.3%. Under the scenario, UK unemployment would increase by 4.5% and residential property prices would fall by 31%.

The test will also consider market volatility, depreciating currencies in emerging markets and oil prices of $20 per barrel.