The United Kingdom's banking regulator announced last week
that it will extend its capital offset policy for corporate lending, in order
to stay aligned with the Bank of England's Funding for Lending scheme (FLS).
The Prudential Regulation Authority (PRA) said it will
extend the corporate piece of the capital offset policy, which was due to expire at the end of this month, until 30
Jan. 2015. The policy, devised by the Financial Services Authority last year,
consisted of temporary adjustments to the prudential framework to prevent undue
constraints on the credit market from minimum capital requirements. Typically,
any increase in lending to the private sector also increases a firm's minimum
Pillar 1 capital requirements automatically. Under the temporary policy, the
PRA offset any increase that results from net new lending to private
non-financial corporations or households by reducing any increase to the Pillar
2 capital buffer firms must hold. The policy covers net new lending between the
end of June 2012 to the end of December 2013.
The PRA's decision applies only to corporate lending. The
extension does not apply to the capital offset policy for household lending,
which still is scheduled to expire 31 Dec. 2013. Officials said they view that “additional
stimulus” for household lending is no longer needed.
The Bank of England previously announced in the spring that it
would extend the FLS to 30 January 2015. The amount of capital relief available
to corporations will vary and will be determined on an individual basis. Officials
said the decision should aid small and mid-sized businesses seeking funding.
In other news last week, the PRA also announced some decisions
in preparation for the new EU capital regime scheduled to start next year. The PRA is fine-tuning its regulations
in order to meet the new Capital Requirements Directive (CRD) and Capital
Requirements Regulation (CRR). The rules apply to major U.K. banks and building
societies.
The PRA reaffirmed its proposals published in August on the
minimum level of Common Equity Tier 1 (CET1) capital firms must hold. Firms
must meet a 4 percent Pillar 1 CET1 requirement in 2014, and a 4.5 percent
requirement starting 1 Jan. 2015. The required Pillar 1 Tier 1 capital ratio
will be 5.5 percent in 2014, increasing to 6 percent beginning 1 Jan. 2015. The
total requirement for Pillar 1 capital will remain at 8 percent.
The PRA has pledged to finalize its definition of CET1 as
soon as possible. The PRA also announced that firms must meet all Pillar 2A risks,
including risks from pensions, with a minimum of 56 percent CET1 capital
beginning 1 Jan. 2015. After consultation with stakeholders, the PRA is not
going to require firms to meet Pillar 2A completely with CET1 starting in 2016.
The PRA also is changing the framework it has used to
monitor the capital position of large U.K. banks and building societies.
Beginning 1 Jan. 2014, the PRA will require banks to meet a 7 percent CET1
capital ratio and a 3 percent Tier 1 leverage ratio, after adjustments to
risk-weighted assets and CET1 capital. In order to meet requirements of the
Capital Requirements Regulation, firms will have to keep a 3 percent Tier 1
leverage ratio. The new standard will be reviewed next year.
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