Capital review - Capital buffering

Capital buffering
The design of capital buffers

Key decisions

• Size of conservation buffer & CCyB
• Assessing the appropriate usability of capital buffers
• Dividend restrictions & supervisory actions
• How gradualist should we be?
• Transition period
• Longer transition for small banks?

Composition of the capital buffer

• 16% Tier 1 capital ratio
• Normal buffer = 10%
  Options
• More conservative
• More certainty buffer will be
  there when needed
• More useable
• More likely to support
  lending in crisis

Degree of conservatism

• CCyB = 2.5% on average
• Cut to 0% in crisis
• Risk of cutting too early or
  face sequence of shocks
• Conservation = 7.5%
• Minimum + conservation
  buffer = 13.5% T1 capital
• 1/100 crisis probability

Degree of lending support

• In theory, could support up to 15% more lending
• Based on leverage ratio ($10.50 of lending for every $1 of capital) and
  assumes linear relationship between capital and lending
• In practice, may be closer to 2%
• Around $1 capital for $1 of lending
• Based on empirical study of the impact of changes in BoE Pillar 2 reqs
• Likely to be an underestimate

Dividend restrictions & supervisory actions Supervisory actions Dividend restrictions (% of earnings that can be paid out) Option A (graduated) Option B (current) Option C (hard) None 7.5%+ 80% 60% 0% Require capital plan 5 - 7.5% 40% 40% 0% Supervisory actions* 2.5 - 5% 0% 20% 0% Make directions / prepare for OBR or stat manager 0 - 2.5% 0% 0% 0%

• For example, issue instructions to a bank’s board, change CoRs to strengthen other risk buffers.

Transition period

• 5 year transition period
  Year Conservation CCyB
  2019 2.5 0
  2020 4 0
  2021 5.5 0
  2022 7 0
  2023 7.5 1
  2024 7.5 2.5

Transition period – impact on profit

• Includes capital impact of risk weight changes for IRB banks

If 10yr transition for small banks

• Includes capital impact of risk weight changes for IRB banks