The loosening of liquidity requirements announced by Mark Carney and the Prudential Regulatory Authority (PRA) could be a significant boon to bank earnings, according to market watchers.
Bank of England governor Carney said:
For major banks and building societies meeting the minimum 7% capital threshold, the Bank of England will reduce the level of required liquid asset holdings. The effect will be to lower total required holdings by £90 billion, once all eight major banks and building societies meet the capital threshold.
That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy.
The PRA will amend its current liquidity framework such that firms should hold highly liquid assets broadly equivalent to 80% of the ‘Liquidity Coverage Ratio’ (LCR) agreed by the Basel Committee on Banking Supervision (BCBS) in January 2013.
While supervisors will retain the ability to set higher liquidity levels for individual banks and building societies, the PRA estimates that, once all of the largest eight UK banks and building societies have met a 7% core equity capital ratio, around £90bn could be released to support lending to the real economy.
That could result in an earnings boost of as much as five to 10 per cent for banks:
Carney's liquidity policy 4 banks cd equal an earnings boost of about 5-10pc big 4 uk banks. Banks earn 2pc more on loans compared w guilts— Helia Ebrahimi (@heliaebrahimi) August 28, 2013