Fresh lending fears as PRA demands ‘higher quality’ capital

The Prudential Regulation Authority has proposed “enhancements” to the capital adequacy regime covering banks, building societies and investment firms that will require a higher “quality” of capital to be held in reserve to meet minimum regulatory requirements.

In a move that may prompt fears of a further lending retrenchment, the PRA has published a consultation paper on changes to rules to implement the European Union’s capital requirements directive (CRD IV).

Under the proposed changes, the total capital firms are required to hold will remain unchanged at 8 per cent. However, the amount of this that must be made up of core ‘tier 1’ equity will increase from 4 per cent to 4.5 per cent from January 2015, while the total ‘tier 1’ allocation will rise from 5.5 per cent to 6 per cent.

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The remaining capital requirement, known as ‘pillar 2’, is divided into capital held against risks not captured or not fully captured by the regulations (2A) and risks to which a firm may become exposed over a forward-looking planning horizon (2B).

Under the current regime pillar 2A can be met with any regulatory capital, but the PRA is proposing that firms should meet this requirement with at least 56 per cent core equity ‘tier 1’ (CET1) capital from 1 January 2015.

This, it said, will bring the capital quality of pillar 2A in line with that of pillar 1. The regulator is consulting on whether from 1 January 2016 onwards the pillar 2A requirement should be met with CET1 only or a different combination of capital.

Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the PRA said: “Well capitalised and resilient firms are crucial for ensuring financial stability and supporting UK growth.

“The PRA has already acted to increase both the amount and quality of capital held by firms, reflecting our determination to improve the stability of UK firms after the crisis. This has put UK firms in a good position to meet the new requirements whilst continuing to provide banking services and support lending to the real economy.”

The PRA will publish a policy statement with feedback, finalised rules and final supervisory statements in December 2013.