Bank of England plans to break with EU with tougher bank capital rule

The Bank of England is preparing its first significant break with EU regulation with a proposal that would make bank capital rules stricter in the UK than on the continent.

The European Banking Authority decided late last year that lenders should be able to account for software investments within their core capital levels. For example, if a bank spends 100 million euros on a new trading system, a large part of that amount can now be considered loss-absorbing capital.

But in a harsh verdict on the decision, the BoE’s Prudential Regulatory Authority has says that he had “found no credible evidence that software assets can effectively absorb losses under stress” and is “therefore concerned. . .[the rule]could harm the security and soundness of UK businesses ”.

Christopher Cant, analyst at Autonomous, said “the wording of the statement. . . is unusually strong ”and this makes the“ view of the PRA bleak ”. . . on the non-deduction of software intangible assets rather simple ”.

In one sharp speech BoE Governor Andrew Bailey doubled his stance on Wednesday, saying EU policy “would misrepresent a bank’s loss absorbing capacity” and conflict with standards. Internationally recognized Basel. On Friday, the BoE began a consultation on abolishing the rule.

“It is incredibly unlikely when a bank finds itself in trouble that these investments will have any realizable value,” said a person familiar with the thinking of the UK supervisor.

“The banks were pressuring them on this subject, arguing that they should be released to invest in IT, defend against fintechs and compete with the big technological and American banks,” they added. “It convinced the European political machine, but not us.”

The BoE’s plans come as prospects fade that the EU will grant “equivalence” status to British regulations – dashing the City’s hopes of regaining meaningful access to European markets.

The regulator’s proposal will toughen the rules for UK banks relative to their European rivals and potentially reduce the amount they can pay out in dividends. Payments to shareholders are already strictly capped by regulators to ensure they retain enough capital to absorb Covid-related loan losses and continue to lend during the pandemic.

The changes to EU regulations – known as CRR2 – are said to have resulted in a capital increase of around € 20 billion in the EU banking sector – or around 30 basis points of capital from CET1 base – according to a EBA report Last year.

Of that, around € 3.6bn is tied to Britain’s five biggest banks, meaning the changes proposed by the PRA will strike a blow for companies like Lloyds – which will lose more than £ 1bn. sterling capital relief – followed by Standard Chartered and Barclays.

In addition, smaller challenger banks such as Virgin Money, Metro Bank and Close Brothers are “highly exposed” to change due to recent major IT projects, according to Cant, the independent analyst. Virgin is said to have benefited from almost £ 100million in additional capital as part of the changes to the EU.

Privately, EBA officials have some sympathy for the BoE’s position. In 2018, they wrote to their EU counterparts to oppose more favorable capital treatment for banks’ software investments, stating: “The software treatment should not be hastily changed since the deduction as currently applied still reflects the probable lack of software value in resolution and even more so in liquidation ”.

A European official said there was “political logic” in giving banks in the region capital relief on their software investments. The official said this would both prevent European lenders from being at a disadvantage compared to U.S. banks which enjoy equally favorable capital treatment and help them compete with tech groups, many of which are encroaching on markets. financial services.

After EU lawmakers insisted on the change, EBA opted for a compromise whereby new software investments by banks are matched with capital over three years. The EBA declined to comment further.

The European Commission did not respond to a request for comment.

Additional reporting by Michael Peel.


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About Jeffrey Wurtsbach

Jeffrey Wurtsbach

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