U.K. bank stocks rise as BoE lowers capital requirements benchmark

Investing.com -- British bank stocks rose on Tuesday after the Bank of England lowered its benchmark for system-wide bank capital requirements, potentially freeing up more capital for lending and shareholder returns.

The Financial Policy Committee (FPC) reduced its benchmark for Tier 1 capital requirements to around 13% of risk-weighted assets, down from the previous 14% level established in 2015.

Shares of Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC) each gained 1.5%, Standard Chartered PLC (LON:STAN) rose 1.4%, and HSBC Holdings PLC (LON:HSBA) added 0.9%.

This adjustment, equivalent to a Common Equity Tier 1 (CET1) ratio of approximately 11%, reflects the FPC’s updated assessment of the appropriate level of capital needed to maintain financial stability while supporting economic growth.

The decision follows the FPC’s comprehensive review of how capital requirements have evolved since its previous assessments. The committee noted that the UK banking system has successfully supported the real economy through several macroeconomic shocks, including those related to the COVID-19 pandemic and Russia’s invasion of Ukraine.

"Given the reduction in the FPC’s benchmark, banks should have greater certainty and confidence in using their capital resources to lend to UK households and businesses," the Bank of England stated in its Financial Stability in Focus report.

The adjustment is consistent with changes in the financial system since the FPC’s first assessment, including a reduction in the systemic importance of some banks and improvements in risk measurement. The implementation of Basel 3.1 regulations, scheduled for January 2027, is expected to improve risk measurement further, allowing the Prudential Regulation Authority to reduce minimum requirements by around 0.5 percentage points.

The FPC also announced plans to review the implementation of the leverage ratio in the UK and to work with regulators to enhance the usability of regulatory buffers, potentially reducing banks’ incentives to hold excess capital.

UK banks currently maintain capital headroom of about 2% of risk-weighted assets over their requirements, capital that could potentially be deployed for increased lending or returned to shareholders following this benchmark reduction.