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Bank of England considered bank capital buffer hike but waiting to watch risks

LONDON (Reuters) - The Bank of England said it considered this month increasing the amount of money banks must set aside to counter their risks as lending in Britain grows, but it held off taking a decision until June.

A man wears a bowler hat outside the Bank of England in the City of London, Britain, November 2, 2017. REUTERS/Toby Melville

The BoE said on Tuesday its Financial Policy Committee, which oversees risks to the economy from the banking system, had seen arguments for setting the so-called countercyclical capital buffer (CCyB) a little above its current level of 1 percent of a bank’s risk-weighted assets.

“Risks had increased since the Committee first judged that a 1 percent UK CCyB rate was appropriate, in Q1 2016,” the BoE said in a series of minutes from the FPC’s meeting on March 12.

Although British economic growth slowed last year following the 2016 vote to leave the European Union, it held up better than the BoE and most economists had expected. A Brexit transition deal struck by London and Brussels earlier this month has further eased short-term concerns about growth.

The FPC said on Tuesday that risks of a Brexit hit to Britain’s huge financial services industry had eased since its previous meeting in November.

On the possibility of raising the CCyB, the FPC said it had to be forward-looking and “waiting for a more marked evolution in domestic risks before acting could result in a need to consider sharper adjustments to the UK CcyB rate, which would likely carry larger economic costs”, the minutes said.

A “measured increase” in the first quarter of 2018 could be accommodated by banks without a need to tighten credit conditions and would not have been a shock, they said.

But the FPC also listed arguments for keeping the CCyB at 1 percent, including modest growth in lending, and it said signs of intensifying risk appetite would need to persist to justify an increase in the CCyB.

More targeted options could be appropriate and the FPC stressed its preference of raising the CCyB rate only gradually.

“At this stage, it might be beneficial to note the probable direction for the UK CCyB rate, given how risk-taking had developed, and to observe the evolution of risks over the coming months in considering whether a rise was warranted,” the minutes said.

The central bank also noted there had been an increase in lending close to the riskiest end of the mortgage market.

In 2014, the BoE limited lenders’ ability to issue mortgages that were worth more than 4.5 times a borrower’s annual income.

The share of lending just below the highest loan-to-value ratio had recovered from troughs seen during the global financial crisis although it remained significantly below pre-crisis levels, the BoE said.

Reporting by William Schomberg and Andrew MacAskill; editing by David Stamp