Capital and liquidity rules for the biggest UK banks have been quietly relaxed in an effort to stimulate lending, a move that puts Britain at the forefront of a global experiment to use bank regulation to moderate the economic cycle.
The Financial Services Authority recently informed banks that they will not be required to hold any extra capital against new UK loans they make that qualify for a funding for lending scheme targeted at increasing money for corporate borrowers.
UK-domiciled banks such as Royal Bank of Scotland , Lloyds and HSBCand UK subsidiaries such as Santander UK can treat that new lending as basically risk-free for regulatory purpose.
London regulators have also stepped back from tough overall capital rules they imposed after the Basel III reform package was adopted. No longer will UK banks be required to achieve and maintain a core ratio equal to 10 per cent of their assets, adjusted for risk by the end of next year.
Instead, individual UK banks have been set numerical targets for capital and have been told their ratio can drop below 10 per cent in the meantime. The absolute number means banks cannot meet regulatory targets by cutting lending and the flexibility on the ratio gives them room to expand lending as demand grows.
The goal is to avoid rapid deleveraging that would harm activity in the economy, Andrew Bailey, head of the FSAs prudential business unit, told the Financial Times.
The FSAs move highlights how the UK is at the forefront of macroprudential oversight in which regulators consider not just whether individual banks are sound but also broader economic and stability concerns. From next year, the combination will become official as the Bank of England runs monetary policy, supervises banks and promotes financial stability.
But other countries may not be far behind. Under the Basel III package, member nations are specifically encouraged to consider imposing so-called countercyclical capital buffers to damp down bubbles.
The FSA has also relaxed liquidity rules to include a broader variety of assets in the buffers that banks must hold in case of a run by depositors or other market crisis. Up to now, only sovereigns and cash were acceptable, but now banks can fill up to 10 per cent of the required buffer with anything the BofE has agreed to accept as collateral.
Taken together, the UK moves are aimed at heading off a severe double-dip recession and making sure that regulation is not choking off the flow of capital to the real economy.
They dont want a double whammy where the banks are more and more solid and the economy isnt moving, said a top executive of one of the banks.
Simon Hills of the British Bankers Association called the eased requirements a beneficial rebalancing...which will help banks and their customers.
Analysts warned that the shift could provide the industry with its first real opening to water down UK standards since the start of the financial crisis. Once capital ratios come down, regulators may be hard-pressed to push them back up again.
It will be incumbent on the [regulators] to demonstrate that this can be done in a way which continues to minimize the risks to financial stability and costs to the taxpayer, said Richard Reid, research director of the International Centre for Financial Regulation.