One of the Bank of England’s executives on Tuesday proposed changing the global regulatory system to banks’ capital requirements to make it simpler and allow more flexible companies to lend in times of crisis.
Sam Woods, head of the UK Cautionary Authority, used the speech to outline an effective system that would eliminate a series of complex capital requirements for banks in favor of a simple common capital threshold that could be relaxed during a crisis to allow companies to keep lending.
The Basel Global Regulatory Commission, whose members include the BoE, is examining how to make the so-called banks’ capital pool more flexible and efficient.
Woods’ proposals include the removal of a string of jargon-laden regulatory capital requirements, such as the anti-cyclical buffer.
Instead, global regulators will calculate banks’ individual capital requirements through stress tests, their own considerations about the riskiness of business models and the general macroeconomic climate.
“My simple framework revolves around one buffer and can be the release of common capital, which sits above a low minimum requirement,” said Woods, who is also deputy governor of the Bank of England, at a City Week event in London.
Using the metaphor of a concept car, he called the system “Bufferati”, saying that his speech was meant to provoke debate in the world of financial regulation.
One of the main problems Woods seeks to address is the tendency of banks to cut back on loans in times of crisis in order to prevent their capital levels from falling below a crucial threshold, leading to regulatory cuts like stopping dividend payments and repurchasing shares.
Bank executives also strive to keep the capital levels of their companies high to prevent shareholders from losing confidence in their strategies.
Under Woods’ proposed shake-up, any bank buffer of capital above the minimum level may be released during an economic downturn or crisis, with no negative consequences for the lender.
This will leave the economy with more funding and less chance of recession, he said.
Since the Basel Commission’s existing capital reforms have not yet been 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 its proposals would not form part of a strategy to improve the country’s financial competitiveness after the Brexit.
In a separate speech at the same conference, the Director General of the Financial Conduct Authority, Nikhil Rathi, warned EU financial services companies with “significant businesses in the UK” that they must maintain proper UK operations and authorizations to ensure effective regulatory oversight.
“If you’re mostly in the UK, if most of your customers are here, it’s because your main entity should be here as well,” Rathi said. “It better protects UK investors from harm.”
BoE official proposes overhaul of global capital rules for banks Source link BoE official proposes overhaul of global capital rules for banks