On 29 January 2016 the Bank of England (2016a) published for consultation the Financial Policy Committee’s proposed framework for the systemic risk buffer for UK banks. The SRB is the additional buffer of equity capital, on top of capital requirements that apply to banks generally, that ring-fenced banks2 (and large building societies) of systemic importance must have in their funding structures from 2019. Under the applicable Regulations (HM Treasury, 2015) the BoE may set SRB rates up to 3% in terms of risk-weighted assets (RWAs).
The BoE proposes to set asset thresholds for the application of the SRB such that (i) the SRB is zero below £175 billion of assets, which is close to 10% of GDP, (ii) no bank has the full 3% SRB rate, and (iii) net of the buffer applicable to some UK banks on account of their global systemic importance, the proposed SRB is expected to add just 0.3% of RWAs to equity capital the UK banking system. This approach follows a downward revision in the BoE’s estimate of the appropriate level equity capital for UK banking.
In this response to the consultation the author argues that the BoE should instead apply the full 3% SRB rate to all major ring-fenced banks in the UK. The relevant banks could easily achieve that by 2019, and it would substantially enhance UK financial stability in the public interest.
