UK watchdog eases bank capital rule for pension risk
LONDON (Reuters) - Britain's banking regulator relaxed a new rule determining the quality of assets banks must hold to cover risks from pension liabilities.
The Bank of England's Prudential Regulation Authority (PRA) had proposed in August that all the extra capital to be held should eventually be in the most expensive form, such as shares or retained earnings.
The PRA said on Friday that "in light of consultation responses" it would now require at least 56 percent of the supplementary capital to cover mainly pension risks in top quality assets, and not all of it over time.
The new rule will come into force on January 1, 2015, a year earlier than proposed.
Shares in Barclays, which was seen as having to find the most capital, were up nearly 3 percent, with many of the other top UK banks also rising.
The main contention had been around so-called Pillar 2 capital, the funds that a regulator demands of each bank on top of its mandatory core minimum buffer.
Banks currently meet the requirements to cover pension risks and other Pillar 2 requirements with any form of regulatory capital such as cheaper CoCos or contingent capital hybrid debt, and the original proposal from the PRA raised hackles banks might have to meet it all with equity.
Analysts had said the original proposals could have forced banks to hold at least 11 percent core capital.
Following a rights issue in the summer Barclays' core capital was 9.6 percent. It had been selling CoCos to lift its capital. Analysts had predicted it could have to find several billion pounds more capital, but said they now think Barclays will be able to meet the new requirements under existing plans.
"This is especially good for Barclays. It means the requirement can be met with more cost effective instruments," said Ian Gordon, an analyst at Investec, who added that the sector as a whole would benefit now the uncertainty had ended.
Banks had challenged the inclusion of pension risk in the capital rule but the PRA rejected their arguments.
"These decisions will enhance the stability of the financial sector and strengthen the capital regime in the UK," the PRA said.
"Although the PRA has not finalized all aspects of the rules, it is setting out a number of key decisions in order to give firms clarity on the key policy issues that affect the minimum level of common equity tier 1 (CET1) capital which firms need to maintain," the PRA said.
The PRA said eight major lenders and building societies are expected to hold a core capital buffer equivalent to 7 percent of their risk-weighted assets from January 2014.
They are: Barclays, Co-operative Bank, HSBC, Lloyds, Nationwide, Royal Bank of Scotland, Santander UK and Standard Chartered.
The eight must comply with a leverage ratio of 3 percent from the same date. This is a measure of capital in proportion to a bank's total assets on a non-risk weighted basis.
These minimums come from a global bank capital accord known as Basel III, which is not due to take full effect until the start of 2019 but Britain is moving earlier with major lenders.
The Co-op Bank, Barclays and Nationwide have already announced plans on how they will meet these targets. Barclays and Nationwide are being allowed to keep their leverage ratio deadline of mid-2014 and end-2014, respectively.
The watchdog also published a timetable for how smaller banks must comply with the new capital rules which are being introduced across the European Union and based on Basel.
(Additional reporting by Steve Slater; Editing by Elaine Hardcastle)
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