PRA finds evidence that banks are reluctant to use their capital buffers

Victoria Saporta, Executive Director of Prudential Policy, gave a speech discussing banks’ reluctance to use their capital buffers.

PRA requires UK banks to hold capital ‘buffers’, but the PRA has found evidence to suggest that banks are reluctant to use them because of fear of breaching regulatory thresholds and potential market stigma. Banks’ reluctance to use their capital buffers can have a negative impact on lending.

In the current Basel framework, only the Countercyclical Capital Buffers (CCyB) is releasable. All other buffers that sit above minima are in theory usable but not releasable. CCyB represents an effective tool to ensure firms continue to provide credit to households and businesses during times of stress or when particular risks crystallise.

Releasing a great portion of capital buffers naturally means that firms are allowed to get closer to minimum requirements. But if firms perceive that buffers are not usable in an economic downturn and that they need to stay well above minima they will do so by cutting lending or fire selling assets. With appropriate controls, making the  Capital Conservation Buffer (CCoB) releasable will enhance also the resilience of the banking system. PRA confirmed that it would also need to ensure that an effective capital conservation mechanism is in place. This would prevent the released capital from being distributed inappropriately and ensure that firms would be able to rebuild the buffer in the future.

Similarly on capital liquidity, the results of the Liquidity Biennial Exploratory Scenario (LBES) stress-testing exercise conducted by the BoE suggest that banks would be unwilling to allow their LCR to fall below the 100% level, even in a severe stress, suggesting that there is a liquid asset usability issues that needs to be addressed.

Harshil Patel