One of the Bank of England’s senior officials on Tuesday proposed that the global regulatory system for banks’ capital requirements be overhauled to make it simpler and allow companies more flexibility to lend during a crisis.
Sam Woods, head of the UK Prudential Regulation Authority, used a speech to outline a streamlined system that would eliminate a series of complex capital requirements for banks in favour of a simple common equity threshold that could be relaxed during a crisis to enable companies to keep lending.
The Basel committee of global regulators, whose members include the BoE, is reviewing how to make banks’ so-called capital buffers more flexible and effective.
Woods’ proposals envisage the removal of a host of jargon-heavy regulatory capital requirements, such as the countercyclical buffer.
Instead, global regulators would calculate banks’ individual capital requirements using stress tests, their own judgments about riskiness of business models and the general macroeconomic climate.
“My simple framework revolves around a single, releasable buffer of common equity, sitting above a low minimum requirement,” said Woods, who is also deputy governor of the Bank of England, speaking at a City Week event in London.
Using the metaphor of a concept car, he named the system “Bufferati”, and said his speech was intended to provoke debate in the world of financial regulation.
One of the main problems Woods seeks to address is banks’ tendency to cut lending in a crisis in order to avoid their capital levels falling below crucial thresholds, which leads to regulatory strictures such as halting dividend payments and share buybacks.
Bank executives also strive to keep their companies’ capital levels high to avoid shareholders losing confidence in their strategies.
Under Woods’ proposed shake-up, a bank’s entire capital buffer above the minimum level could be released during an economic downturn or crisis, with no negative consequences for the lender.
This would leave the economy with more financing and less chance of a recession, he said.
With existing Basel committee capital reforms still not fully implemented 14 years after the financial crisis, it is unlikely that Woods’ proposals will be adopted quickly.
Woods also said the UK would not deviate from international banking regulation and his proposals would not form part of a strategy to improve the country’s financial competitiveness after Brexit.
In a separate speech at the same conference, Financial Conduct Authority chief executive Nikhil Rathi warned EU financial services companies with “significant UK businesses” that they must maintain appropriate operations and authorisations in Britain to ensure effective regulatory supervision.
“If you are a predominantly UK business, if most of your clients are here, it follows that your main entity should be here as well,” said Rathi. “This better protects UK-based investors from harm.”