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UK might tighten bank capital rules as economy peaks: BoE's Taylor

The Bank of England will assess the resilience of Britain's seven biggest banks against a 65 per cent plunge in the Hang Seng Index, as well as a 34 per cent collapse in Brent crude oil prices, in this year's stress test. 

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MAY 26, 20158:08 PM

[LONDON] The next change to bank capital requirements in Britain is likely to be a tightening rather than a loosening as the economic recovery moves towards a peak, a Bank of England policymaker has said.

Martin Taylor, a member of the BoE's Financial Policy Committee (FPC), said a global deal on banking standards was close and the industry in Britain was well placed to meet it.

"At the same time... the increasingly shrill emergence of voices calling for a regulatory softening is both structurally wrong and conjuncturally wrong," he said in a speech delivered in London on May 22 but only released by the BoE on Tuesday.

Banks across the world are being forced to hold more capital under new rules in a bid to avert a repeat of the 2007-09 financial crisis when taxpayers had to bail out undercapitalised lenders. But some lenders have said this makes it hard for them to lend more and help contribute to economic growth.

The FPC was set up to plug the supervisory gaps highlighted by the crisis and has powers to order banks to top up their capital buffers.

Mr Taylor said the recovery in Britain's economy, while restrained, may well be closer to its peak than to its trough.

The extra capital that banks are now holding may begin to have a desirable "counter-cyclical" effect or help dampen potential overheating.

"So calls from banks to swing back that pendulum and reduce regulatory requirements are doubly to be resisted," Mr Taylor said. "If anything, we're reaching the point of the cycle where macroprudential policy should be tightened in any case."

"The policy question here for me, and it's an open question, is at what stage we may need to tighten it over and above what's been happening automatically as the banks have transitioned to the new regulatory rules. But loosening now would certainly make no sense," Mr Taylor said.

Mr Taylor was chief executive officer of Barclays Plc in the mid-1990s.

Banks are also loading up on so-called contingent capital or CoCos, a form of hybrid debt that act as a supplement to core capital buffers in times of trouble.

"I worry that CoCos may be subject to potentially destabilising manipulation by convertible arbitrageurs, which is why I think we should be careful how large a role we allow them to play," Mr Taylor said.

REUTERS