Regulator gives banks some breathing space

The Financial Services Authority said yesterday the shift in policy was set out in the Bank of England’s Financial Policy Committee in September, and banks were aware of the changes.

Banks no longer need to have a 10 per cent core capital ratio but can instead hold a fixed amount of capital. The aim is to get banks to strengthen their capital and also be able to dip into buffers at times of difficulty so they can keep lending.

Andrew Bailey, head of the FSA’s prudential business unit, had said last week banks can cut the amount of capital they hold to the minimum requirements, and trim their cash-like liquidity buffers to help increase lending.

The regulator will also not require banks to hold extra capital against new lending that qualifies for a ‘funding for lending’ (FLS) scheme targeted at loans to corporate borrowers.

The shift in tone lifted bank shares, as British regulators have been among the strictest in implementing new global regulations.

“If they get a bit of leeway from the regulator, that is breathing space for these banks which, in the short term, is good for the shares. Longer term, I stay very cautious,” Bernstein Research senior analyst Chirantan Barua said.