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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