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BoE announces SRB detail

On 29 January, the BoE announced a public consultation defining new capital requirements for all ringfenced retail lenders. The consultation proposes the imposition of a “systemic risk buffer” (SRB) on banks and building societies, ensuring that critical financial services are maintained even in highly-stressed periods.

The buffer is scaled in according to total risk-weighted assets, the SRB will apply to those banks with assets of more than £25bn., but will be 0% up to £175bn. Institutions will be placed into a series of buckets up to the largest with total assets exceeding £755bn., with a corresponding SRB at 3%. The largest UK lenders by asset size currently fall into the penultimate bucket, having assets above £610bn., but less than £755bn, and will be assessed at 2.5%. The SRB will be composed solely of equity capital, and will form part of the 11% Tier 1 RWA requirement; the Bank accordingly expects the sum to be raised by re-allocation rather than fresh equity. Ringfenced firms will also be required to comply with an additional leverage ratio buffer rate, calculated at 35% of the SRB.

The Bank calculates that institutions comprising 80% of lending to small business and households will be subject to an SRB from 1-2.5%, and that the rule will equate to a 0.5% increase in equity requirements across the UK financial system. The aggregate impact on lending spreads is expected to be outweighed by a 0.8% uplift to GDP as a result of the SRB.

Deputy Governor Sir Jon Cunliffe said “The financial crisis demonstrated the long-lasting damage that can be caused when large banks become distressed and have to cut back lending to the economy. These proposals are intended to reduce the risk of this happening again.”

The regulation is expected to be completed by 31 May 2016, and to take effect from 2019. The consultation remains open until 22 April.

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