The Bank of England's move to make financial institutions keep aside a capital buffer is historic but it will not impact the banking system capital as several other buffers have been reduced, experts said.
The UK central bank on Tuesday announced that it would raise the rate of the capital buffer that it requires financial institutions to have from 0% to 0.5%, effective 29 March 2017.
This shows that Bank's Financial Policy Committee (FPC) flexing its macroprudential muscles, and using this particular tool for the first time, experts said.
Simon Wells, chief UK economist at HSBC said the move is historic
"While a big symbolic step, there is unlikely to be a large impact on aggregate banking system capital," he wrote in a note.
"The FPC hopes the CCyB (counter cyclical buffer) will be an important and permanent tool in helping banks absorb losses in stressed conditions and therefore support the economy rather than amplifying the stress."
The BOE said in a statement that it was a "one-off adjustment reflecting the transition to the new capital framework," which it hopes will increase transparency of the system and thus its stability.
The FPC is responsible for setting the CCyB rate which applies to UK exposures of banks, building societies and large investment firms incorporated in the UK, and also to institutions which lend into the UK. The intention is to enhance the stability of the financial system during periods of stress.
The purpose of the CCyB is to raise the amount of capital available for banks to lend in the event of a downturn in the economy. The FPC announced late last year that it intended to have the CCyB at about 1% of risk weighted assets under normal circumstances, and that it intended to raise the rate gradually towards that total.
The FPC also noted in its statement that the financial situation in the UK had worsened since it last made a report in November last year. The statement added that the most imminent threat to stability was the run-up to the Brexit referendum on June 23.
"Some pre-existing risks have crystallised, drawing on the resilience of the system. Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum," the Bank said.
