Bank of England eases leverage rules for British banks

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BoE eases leverage rules

Highlights

The Bank of England will remove one buffer from the leverage ratio and make a greater share of capital buffers releasable to improve their effectiveness.
These changes respond to leverage ratios becoming binding for three of seven major British banks, increasing their obligations relative to international peers.
The revised capital buffer framework, targeting large UK-focused banks like Lloyds, NatWest, and Santander UK, comes amid rising competition following US leverage rule relaxation in November.

Capital buffer changes and consultation plan

As reported by Reuters, the Bank of England's Financial Policy Committee sets out plans to make capital buffers easier to use in periods of stress and to soften the effect of the leverage ratio, which requires lenders to hold a minimum level of capital against total assets.

The central bank says it will remove one buffer from the leverage ratio and make a greater share of other buffers releasable under the proposed changes. It says the framework becomes more proportionate and more effective by being better targeted.

When the leverage ratio was introduced, it was designed as a backstop to risk-weighted capital requirements. The Bank of England says it has become binding for three of seven major British banks and has left them facing higher obligations than international peers.

The package on buffer usability, which is due to go to public consultation later in the year, is aimed at reducing banks' incentives to restrict lending during stress. Under that approach, banks are given multiple years to rebuild buffers.

Competitive pressure and impact on UK lenders

The Bank of England's move follows a relaxation of U.S. leverage requirements in November, a shift that raises competitive pressure for British lenders as regulators in major markets reassess resilience rules.

The work on buffer usability only affects large, domestically focused banks such as Lloyds, NatWest and Santander UK, because rules for international banks are set by Basel. The Financial Policy Committee also says there is a clear case for a single buffer that can be released in stress, although that would require international backing.

The committee says it works with the Prudential Regulation Authority and international authorities to pursue broader reform of the capital buffer framework. That effort is intended to simplify the regime while preserving banks' capacity to keep lending during periods of market strain.

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