On 26 April 2022, the Bank of England published a speech by Sam Woods (Deputy Governor for Prudential Regulation and CEO of the PRA) entitled Bufferati.
In his speech, Mr Woods covers the debate currently going on amongst regulators about ‘buffer usability’ and the extent to which banks are in reality willing and able to use their buffers of capital to keep lending to the real economy in a downturn. He also sets out a radical, alternative approach that he argues would be much simpler and calls it ‘Bufferati’.
At the core of this concept is a single capital buffer, calibrated to reflect both micro-prudential and macro-prudential risks and replacing the entirety of the current set of buffers. Mr Woods argues that micro-prudential and macro-prudential regulation both have the same fundamental goal: a financial system that serves the real economy, including through stresses. They aim to avoid banking crises, disorderly failures or adverse credit supply shocks that can amplify downturns and turn recessions into depressions. For the Bufferati, Mr Wood’s envisages:
- A single capital buffer, calibrated to reflect both micro-prudential and macro-prudential risks.
- A low minimum capital requirement, to maximise the size of the buffer.
- A ‘ladder of intervention’ based on judgement for firms who enter their buffer – no mechanical triggers and thresholds.
- The entire buffer potentially releasable in a stress.
- All requirements met with common equity.
- A mix of risk-weighted and leverage-based requirements.
- Stress testing at the centre of how capital levels are set.