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UK Countercyclical Capital Buffer Rate Reduced
6th July 2016
Yesterday the Bank of England announced it would immediately cut the countercyclical capital buffer rate for UK firms down to zero.
Reduction to UK Countercyclical Capital Buffer Rate
Effective yesterday, the 5th July 2016, the Bank of England’s Financial Policy Committee (the FPC) reduced the capital requirements for UK banks.
Announced in a Bank of England biannual Financial Stability Report, the countercyclical capital buffer rate has been reduced from 0.5 percent of a bank’s risk weighted assets down to zero. This is with the aim of increasing a bank’s capacity to lend to households and businesses with an estimated £150bn extra capital that could be injected into the economy following the UK’s decision for Brexit.
The countercyclical capital buffer is designed to be lowered in times of economic stress, thus yesterday’s decision to reduce the CCyB is an indicator about the level of UK economic uncertainty post-Brexit.
Whilst an earlier March 2016 announcement by the FCP set to increase the UK’s CCyB to 0.5% of risk weighted assets to be implemented by 29th March next year (2017), the FPC now expects “to maintain a 0% UK CCyB rate until at least June 2017.”
In addition, the FPC made it clear how they wish the freed up capital to be used stating that:
“This action reinforces the FPC’s view that all elements of the substantial capital and liquidity buffers that have been built up by banks are able to be drawn on as necessary to allow them to cushion shocks and maintain the provision of financial services to the real economy, including the supply of credit and support for market functioning.”
FPC, 5th July 2016
As such, lenders will have greater flexibility to immediately maintain their supply of credit to the UK economy.
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Comment from the Bank of England:
“The FPC has set out its view of the outlook for UK financial stability in the Financial Stability Report today, including its decision to reduce the UK countercyclical capital buffer rate to 0% at this time.”
Bank of England, 5th June 2016
The Countercyclical Capital Buffer applies to all UK banks, building societies and investment firms that have not otherwise been exempted by the regulator.
This is a variable rate buffer, the total of which is calculated for each firm as a risk weighted average of the countercyclical capital buffer rates that apply in the jurisdictions where the firm’s credit exposures are located.