Monday, February 15, 2016

B of E Issues Consultation on Systemic Risk Buffer for Ring-Fenced Banks

Author: David Schwartz J.D. CPA

On January 29, 2016, the Bank of England (B of E) issued a consultation paper laying out its proposed framework for the systemic risk buffer (SRB) to be applied to ring-fenced banks and large building societies holding more than £25 billion of retail and small and medium enterprise deposits. The proposals are intended to provide clarity to banks on how much capital they will be required to reserve in connection with the activities of their "ring-fenced" arms.


While the B of E acknowledged that the ring-fenced banks as a sector, which includes HSBC, Lloyds, Barclays and RBS, effectively are already in compliance with the new SRB requirement, the central bank reiterated the need for additional capital, and indicated that any extra capital requirement would be incremental, no more than 0.5 percent of the banking system's total risk-weighted assets.  According to Deputy Governor, Financial Stability, Jon Cunliffe:


“These new rules will mean that large UK banks and building societies are more resilient to adverse shocks, enabling them to continue to lend to households and businesses even in times of stress. The financial crisis demonstrated the long-lasting damage that can be caused when large banks become distressed and have to cut back lending to the economy. These proposals are intended to reduce the risk of this happening again.”


The consultation sets out:


  1. the methodology for assessing and scoring systemic importance;
  2. a proposed threshold of £175 billion of total assets at which firms are considered to be systemically important – requiring no SRB for firms below this threshold;
  3. the calibration of the SRB for firms exceeding the threshold – on current analysis, the FPC expects the largest bank to have an SRB of 2.5% (3% is the maximum permitted SRB); and
  4. an overview of FPC’s current approach on the application of the additional leverage ratio buffer to ring-fenced banks.


As proposed, the SRB will be applied to individual institutions by the Prudential Regulation Authority (PRA) and will be effective, like the ring-fencing rules, beginning in 2019. 


Comments on the consultation are due by April 22, 2016, and B of E intends to finalise the framework promptly thereafter by May 31, 2016.