Bank of England details new capital buffers for ring-fenced banks from 2019

By Huw Jones and Andy Bruce

LONDON, Jan 29 (Reuters) - The Bank of England set out on Friday how much extra capital it wants banks to wrap round their deposit-taking arms from 2019 to keep customer money safe during market shocks, and shield taxpayers from footing the bill for losses.

The proposals, put out to public consultation, aim to give final clarity to banks on how much capital they will have to hold in their "ring-fenced" arms.

The BoE said the ring-fenced banks as a sector, which includes HSBC, Lloyds, Barclays and RBS, effectively comply already with the new "systemic risk buffer" or SRB requirement.

Any extra capital requirement would be incremental, no more than 0.5 percent of the banking system's total risk-weighted assets.

Policymakers see "ring-fencing" as a central lesson from the 2007-09 financial crisis when the government had to shore up lenders to avoid the banking system from freezing up.

In its consultation paper, the BoE said the SRB will apply to ring-fenced banks and building societies with household and company deposits of more than 25 billion pounds.

Not all banks within this scope will have to have an SRB.

The BoE set out a series of "buckets" of gradually higher SRB for banks and buildings societies within scope whose total assets are above 175 billion pounds.

This sub-group of lenders, which make up 80 percent of lending to households and small companies in Britain, will have an SRB ranging from 1 percent to 2.5 percent of their risk-weighted assets.

The systemic risk buffer for firms with assets below 175 billion pounds will be set at zero percent, aimed at encouraging more competition in the sector from challenger banks that have entered the market to take on the dominance of the "Big Four" high street lenders.

The biggest ring-fenced banks, with assets of least 610 billion pounds in 2019, and most likely to include Lloyds, are expected to have a systemic risk buffer of 2.5 percent.

Banks that are required to have a systemic risk buffer will also have a higher leverage ratio, a reference to a lender's broadest measure of capital to non-risk weighted assets.

A bank with a systemic risk buffer of 1 percent would have, for example, an additional leverage ratio buffer of 0.35 percent on top of the current 3 percent minimum leverage ratio.

Regulators say that keeping deposit-taking arms safer in this way would make it more likely that lending to households and companies would continue even during market shocks.

During the financial crisis, banks under stress began reining in lending, with damaging knock-on effects on the wider economy.

The ring-fencing plan, also known as the Vickers reform, will come into effect in 2019, and HSBC bank has already said its ring-fenced arm will be based in Birmingham.

"These new rules will mean that UK banks and building societies are more resilient to adverse shocks, enabling them to continue to lend to households and businesses even in times of stress," BoE Deputy Governor, Jon Cunliffe, said in a statement.

Friday's consultation follows an announcement by the BoE in December when it sketched out the final outlines of how much capital banks will have to hold in future and remove uncertainty hanging over the sector.

It said then that banks will need to hold capital equivalent to 13.5 percent of their risk-weighed assets, and Friday's consultation simply details the new SRB element in this total.

Britain's banking system is already above 13 percent and very close to the 13.5 percent target, meaning very little extra capital is needed, the BoE said.

The systemic risk buffer is expected to add about 0.5 percent of risk-weighted assets to equity requirements of the UK banking system overall, the BoE said.

((huw.jones@thomsonreuters.com; +44 207 542 3326; Reuters Messaging: huw.jones.thomsonreuters.com@reuters.net))