A Bank of England member has suggested a radical simplification of the banks capital buffers system to encourage institutions to keep lending to the real economy in a downturn.
The Basel Committee of global regulators, whose members include the BoE, is looking at how to make buffers more usable after what happened during the pandemic.
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Bank of England (BoE) Deputy Governor Sam Woods proposed a “Bufferati”, or more streamlined system for Basel to consider.
“t I have found myself thinking it might be a good idea to introduce, on the next door assembly line as it were, a new concept car version of the capital stack – radically simpler, radically usable, and a million miles away from the current debate but which might prove instructive over the longer term,” Woods old the City Week event in London.
“My simple framework revolves around a single, releasable buffer of common equity, sitting above a low minimum requirement.”
“This would be radically different from the current regime,” Woods said. Regular stress testing of lenders would determine capital levels.
Regulators are currently debating ‘buffer usability’, the extent to which banks are in reality willing and able to use their buffers of capital to keep lending to the real economy in a downturn, amid fears that unnecessary change is undesirable.
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“While the capital regime is fiendishly complex, its underlying economic goals are fairly simple: ensure that the banking sector has enough capital to absorb losses, preserve financial stability and support the economy through stresses,” Woods said.
“In developing the Bufferati, my guiding principle has been: any element of the framework that isn’t actually necessary to achieve those underlying goals should be removed. The Bufferati is as simple as possible, but no simpler.
Regulators would work out for each bank its capital requirements, based on analysis of risks on the bank’s books, and the general macro economic climate.
Basel’s latest batch of new rules are already being delayed by two years to 2023 in Britain and Europe.
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