BOE Stress Test: UK Banks Resilient, Capital Buffers Cut

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Transcript

00:00This has been a really exciting day for those of us interested in UK financial regulation.

00:03What the Bank of England has said is that back in 2015, they said banks needed a certain level

00:08of capital across the system. That was 14%. They now believe that is 13%. That is quite a big

00:14difference. Now, we're not going to see that flow through until 2027, but it is still theoretically

00:19reducing a lot of capital back into the economy, which banks can use, they say, for lending,

00:24possibly payouts. So it is a significant day for that. And part of the reason they're doing it is,

00:29as you said, nobody failed the UK banking stress test. Everybody's fine. Now, nobody has failed

00:35a stress test since 2016. So that in itself is not unexpected. The other thing, which is obviously

00:40happening right across the UK, is that there's a lot of pressure to support growth. There's a lot

00:45of pressure for the Bank of England to consider the competitiveness of the UK finance industry.

00:49And that is partly what is leading this review. So what they're going to do now is have a review

00:54as well and look at a few tailored areas where they might be able to make regulation better.

00:58And they'll do that early next year.

01:00At the same time, we're lowering capital standards at the same time as flagging risks.

01:06Yes.

01:06So let's talk about the risks. Where do they see the risks? Because there seem to be multiple

01:10pockets of risks that they're worried about at the moment.

01:12It is a delicate balancing act. And they do see a lot of risks. I mean, AI was called out again

01:16as an area of risk. And they are concerned about bubbles there. They're concerned about valuations.

01:20They're concerned about private markets. Later in the week, they will launch a new private market

01:24stress. So there's a lot of risks. And I think the Bank of England is in a dangerous situation

01:28where they're trying to give the minimum amount that they can give while still being seen to

01:34give something. I think that is the game they're in. And we'll have a press conference later

01:39today where we'll be pushing them on, well, if you're lowering the neutral level of capital,

01:43is that not deregulation? Because they've been saying all along, we are not deregulating.

01:48We are simplifying. We're calling it everything but deregulation. But if you actually lower the

01:52number, because the number matters, there's been a lot of other action around bankers, bonuses,

01:56all of that. That's fine. But what really matters is the amount of capital in the system.

02:01And that is what they have now signaled that they will lower, albeit not until...

02:05Does this not bring them into line with others? Does it?

02:07They would argue that it does. They have a new paper out today among the many,

02:11many hundreds of pages this morning, which shows that the UK, having done this, will be in line

02:14with where international neighbours are or where they are headed. That's a bit of a fine

02:20tuning as well, because both the US and the EU, which are the relevant international neighbours,

02:24are both making changes. We don't quite know where they're headed. We suspect they're headed to a

02:28lower place. The other final thing I'd say on that is that while the current level of requirements is

02:3314%, banks actually hold 17%. So banks never trust that they can run at the level. And it's going to

02:41be quite difficult, I think, to convince banks that they can actually take this money out. And that's

02:46part of the challenges. There's been a lot of debate around buffers and how much you need to

02:50maintain these buffers. And the idea is the Bank of England wants to give the banks confidence

02:55that if the requirement is 14 or if it's 13, you can hold something closer to that. And that's

03:01going to be a whole conversation.