Bank of England raises capital requirements for UK banks by $14.5 billion

  • Consumer credit cited as a top concern
  • BoE prepares Brexit contingency plans
  • Sterling falls against the euro
Bank of England Governor Mark Carney leaves after speaking at 2017 Institute of International Finance (IIF) policy summit in Washington, U.S., April 20, 2017.
Yuri Gripas | Reuters
Bank of England Governor Mark Carney leaves after speaking at 2017 Institute of International Finance (IIF) policy summit in Washington, U.S., April 20, 2017.

The Bank of England has told British banks to raise their capital requirements on growing domestic and external risks.

British banks will have to increase their capital buffers by 11.4 billion pounds ($14.5 billion) to protect them from economic risks related to Brexit, growing consumer credit and external shocks such as a slowdown in China.

"The Financial Policy Committee (FPC) is increasing the U.K. countercyclical capital buffer (CCB) rate to 0.5 percent, from 0 percent," the bank said in its latest financial stability report on Tuesday.

"Absent a material change in the outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC expects to increase the rate to 1 percent at its November meeting," the bank added in the report.

The bank had chosen last year to reduce the capital requirements for banks to allow them to loan more to households and firms – a measure aimed at keeping the economy afloat amid the uncertainty on the country's future trade relations with the EU.

However, the financial committee noted that the economy performed better-than-expected and recognized several risks both domestically and external calling for precautions.

Consumer Credit is a top concern

"Risk levels in some sectors are more elevated, notably so in the consumer credit market," the bank said in the Financial Report.

Speaking after the release of the report, Governor Mark Carney of the BoE, didn't want to expand on such concerns but stated that an increase in car financing was among the top worries.

"Individuals must take the judgment whether it's the right time to buy a property or invest in a business, and we're trying to ensure that the financial system is there to help them with that," he said.

The BoE will start publishing tighter rules on consumer lending next month and is set to bring forward stress tests from November to September.

In terms of global risks, the BoE said these "are also judged to be material, as are risks from some asset valuations." It cited the high private-sector borrowing in China as a potential problem for U.K. banks.

However, Carney told reporters on Tuesday that all British banks have enough capital to meet the new requirements, the question is more whether they will add to that.

Brexit contingency plans

The Bank of England has also flagged risks to the country's decision to leave the European Union and is said to be preparing for a number of potential scenarios, including one in which there's no agreement between London and Brussels.

"The FPC is focused on scenarios that, even if they may be the least likely to occur, could have most impact on U.K. financial stability. This includes a scenario in which there is no agreement in place at the point of exit. Such scenarios are where contingency planning and preparation will be most valuable," the BoE said in the report.

The institution led by Mark Carney is concerned that if European firms aren't allowed to keep trading in the same manner, the flow of new banking and insurance services in the U.K. will be disrupted.

"Around 10 percent of the outstanding stock of loans to private non-financial corporations in the United Kingdom is extended by U.K. branches of EEA (European Economic Area) banks. Around 7 percent of general insurance contracts undertaken in the United Kingdom and 3 percent of life insurance contracts are written by EEA insurers. As well as disrupting new business from these providers, fragmentation could require the existing contracts to be transferred to a U.K.-authorized firm in order to address any legal uncertainties as to the status of, and ability to perform, such contracts," the BoE noted.

The British pound dropped about 0.5 percent against the euro on Tuesday after the BoE's announcement on stronger capital controls.

'The striking theme from the BOE's FSR today was one of activism. It wasn't just that there was an increase in the counter cyclical capital buffer, the tweak to the leverage ratio rule, clarification on mortgage lending and bringing forward of the consumer credit stress tests all added up to demonstrate the impetus of FPC members to appear alert and pro-active to financial stability risks," Sam Hill, senior U.K. economist at RBC Capital Markets, told CNBC via email.

He added: "The rest of 2017 doesn't look as though it will be easy for the economy as the consumer is struggling with the combination of weak wage growth and rising inflation and the resulting hit to real incomes."

"Quarterly GDP (gross domestic product) growth rates are expected to be more like the 0.2 percent quarter-on-quarter we saw in the first quarter of 2017 than the 0.7 percent quarter-on-quarter in the fourth quarter of last year."

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