LONDON: The Bank of England set out plans on Tuesday to require banks to hold as much as 10 billion pounds extra capital as the credit cycle moves into a more normal phase, but stopped short of immediate action. The central bank said credit conditions in Britain had largely recovered from the financial crisis as banks began to lend more freely, and warned that asset prices were vulnerable to a big rise in interest rates and emerging market risks. "Following the global financial crisis, there was a period of heightened risk aversion and retrenchment from risk-taking," the BoE said. "The system has now moved out of that period." The central bank said it now expected banks to hold a so-called counter-cyclical capital buffer (CCB) of 1 percent during normal times, and was in the process of tweaking bank-specific requirements with a view to impose this step-by-step from March. The CCB aims to rein in risky lending at frothier stages of the credit cycle. It stands at zero currently, but the BoE has already required some banks to hold extra capital due to firm-specific risks. Some economists and banking analysts had expected the BoE to raise the CCB this month to 0.5 percent. The BoE also said it expected the banking sector as a whole to hold high-grade tier one equity capital of 13.5 percent of risk-weighted assets by 2019, up from 13 percent now -- part of which would overlap with the capital required for the CCB. The BoE has said it wanted to give banks more clarity about its long-run aims for the amount of capital they hold, now that credit conditions had largely got back to normal. Banks have complained that in the past, the BoE has unexpectedly piled on extra capital requirements, making it hard for them to lend or decide which lines of business to stay in. Alongside its half-yearly Financial Stability Report, the BoE also released the results of annual 'stress tests' into how lenders would deal with unexpected economic shocks.
