Bank of England to Ease Capital After Strong Stress Tests

Dow Jones Newswires

The Bank of England Tuesday said it would ease pressure on U.K. banks to hold more capital, drawing a line under years of post-crisis reforms aimed at making the banking sector safer. The central bank said that capital requirements wouldn't continue to creep up in coming years stating that lenders needed to hold Tier 1 equity of 11% of risk adjusted assets by 2019, a target that most banks have nearly already hit. "The system is in sight of where it needs to be," Bank of England Governor Mark Carney told reporters. "There is no new wave of capital requirements coming." The announcement came as the Bank of England issued the results of its latest U.K. bank stress test. The Royal Bank of Scotland Group and Standard Chartered  both failed aspects of the balance sheet check but the central bank stopped short of forcing them to raise more capital. The softer tone from the Bank of England comes as it feels more confident it can safely wind-down broken banks and because lenders hold debt that can be written off in times of crisis. British banks have recently undertaken a broad lobbying campaign pushing regulators to loosen rules or risk damaging the U.K.'s attractiveness as a financial center. Mr. Carney's pledge was welcomed by markets with British bank stocks rising in morning trading. The U.K.-focused banks led the stock rises. RBS and Lloyds were up 3% and 2.7% respectively, while Barclays led the pack, up 3.1%. Asia focused HSBC and Standard Chartered were up more moderately 1.36% and 1.5% respectively. The Bank of England can still tweak capital requirements depending on the strength of the economy using a new tool called the "counter cyclical capital buffer." The buffer is currently at zero but officials signaled they will consider raising it in March. A 1% increase would be equivalent to GBP10 billion ($15.10 billion) of extra capital. But the central bank said some of that would come from reallocating capital already held by banks. The stress test saw a hypothetical scenario where the eurozone and Chinese economy contracts, commodity prices crash and banks wrestling with the default of a handful of major trading partners. Meanwhile fines for bad behavior shot up. Two of the seven banks tested, RBS and Standard Chartered, were singled out for weaknesses by the Bank of England but have already taken action to strengthen their balance sheets, the central bank said Tuesday. Seven British based banks needed to maintain a ratio of core Tier 1 equity to risk weighted assets of 4.5% to pass the test but were also assessed individually. Banks that fell short would have needed to raise equity or further shrink their balance sheets. The banks tested were RBS, Barclays, HSBC Holdings, Lloyds Banking Group, Nationwide Building Society, Santander U.K. and Standard Chartered. RBS didn't meet an individualized capital requirement set by the regulator. The central bank said that the state-controlled lender had already planned to issue bonds which would address any shortfall. Asia focused Standard Chartered didn't hit a key measure but still passed the test, the Bank of England said. The bank has already outlined plans to raise $5.1 billion in equity and restructure its business. The results of the stress test were published alongside the Bank of England's twice-yearly assessment of the risks facing the financial system. Officials cited potential threats from certain corners of the real-estate market and financial-market fragility, but concluded the risks weren't strong enough to warrant any new policy actions. Write to Max Colchester at max.colchester@wsj.com, Jason Douglas at jason.douglas@wsj.com and Margot Patrick at margot.patrick@wsj.com

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