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SNL Financial Report: Regulatory tsunami recedes as BoE says UK banks adequately capitalized

First Published 3rd December 2015

U.K. banks don't need to raise more capital, according to the Bank of England, signaling what could be the end of an era of post-crisis increases in requirements. Report by Jason Webb and Vivien Mae Romo

The Bank of England may just have called time on the so-called "regulatory tsunami" that has imposed ever-costlier requirements on banks since the financial crisis, analysts said Dec. 1 after U.K. stress tests and a financial stability report sounded the all-clear on systemic capital.

While the stress test based on end-2014 balance sheets indicated that two lenders failed, the central bank said it is now content with overall levels of capital and added that revisions to the ways in which banks calculate risk-weighted assets should not force the system as a whole to raise more. Even the two failures will not be required to present new capital plans, thanks to action taken this year.

Shares in Barclays Plc, whose common equity Tier 1 ratio of 11.1% at the end of the third quarter was the lowest among banks examined, had jumped by almost 5% at the close in London, as investors bet that the days of never-ending pressure for more capital build were over. Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc andHSBC Holdings Plc all made gains too.

"Those who see capital building as an inexorable path to 15% are mightily relieved and those who thought that banks were nearing the end have received some broadly reassuring confirmation," Ian Gordon, an analyst at Investec in London, told SNL.

Major U.K. banks' aggregate Tier 1 capital was 13% of risk-weighted assets in September 2015, with lenders still expecting to build equity ratios in the coming years, the BoE said in its stability report. The BoE's financial policy committee considers the appropriate level for Tier 1 capital to be 11% of RWA, including 9.5% of CET1, it said. Tier 1 needs would rise to 13.5% of RWA without changes due to be made to risk-weighting rules, it added.

"The FPC is not therefore seeking further structural increases in capital requirements for the system as a whole," the central bank said.

U.K. financial conditions are shifting "out of the post-crisis phase," the BoE said, adding that as a result of this the FPC would in March consider raising its countercyclical buffer from zero. The buffer, a post-crisis innovation that is meant to both ensure banks build up capital in good times to cope with bad and slow the riskiest lending when the economy heats up, would likely be set at 1% before risks facing the financial system become elevated, the BoE said.

The BoE had reassuring words for bankers concerned by ongoing reviews by global regulators of models used by lenders to calculate the risk of their trading books and for setting capital levels to be held against different types of loans. Any resulting falls in risk-weighted assets causing increased capital needs would be balanced by reductions in microprudential requirements because the new rules would make banks safer, the BoE said.

The bank's governor, Mark Carney, drove the message home in a press conference, stressing that "there is no Basel IV," in a reference to fears that regulators' reviews would hike capital requirements drastically beyond those of Basel III. Carney's words resonate beyond the U.K., thanks to his position as chair of the Financial Stability Board, which groups major world central banks, regulators and treasuries.

"The FPC is being explicit in saying that for the sector overall it is not increasing capital requirements further, it has taken into account RWA definition changes, and is seeking to minimize the motivation to hold additional voluntary buffers due to regulatory uncertainty," Deutsche Bank analysts said in a research note.

RBS and Standard Chartered Plc both failed the stress test, with their CET1 ratios calculated to fall below the minimum 6% in a scenario of severe global stress without including "strategic" management actions, such as reductions in staff costs. StanChart's CET1 ratio was 5.4% even after strategic action and conversion of Additional Tier 1 bonds into equity, while RBS's edged up to 6.1%. Both banks have since taken measures allowing them to avoid having to submit new capital plans to the BoE, including plans for AT1 sales by RBS.

Lloyds and Santander UK Plc preserved CET1 ratios of 9.5% without cutting costs or converting bonds.

The stress test removed investors' doubts about Lloyds' ability to meet investor expectations for dividend payouts, Diarmaid Sheridan, an analyst at Davy Stockbrokers in Dublin, told SNL, saying this can be interpreted as an endorsement of management plans in terms of capital levels.

"At this point capital build is probably over," he said, referring to U.K. banks as a whole, although he noted that lenders still face programmed increases in other requirements, such as those for stocks of bail-in-able debt under the Total Loss-Absorbing Capacity rules for globally systemic institutions and Europe's upcoming minimum requirement of own funds and eligible liabilities.

While the BoE has yet to raise its countercyclical buffer, it is monitoring growing risks, including buy-to-let mortgages.

"The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests," the BoE said in the financial stability report.

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