UK banks get capital relief

* Bank of England relaxes countercyclical buffer

* Possible delay to MREL implementation timeline

By Alice Gledhill

LONDON, July 8 (IFR) - UK lenders were given some breathing room this week when the Bank of England said it was loosening up some of their capital requirements, though the biggest boon could come from a push back on the deadline to meet loss absorbing debt requirements.

The BoE reversed a decision it took in March to increase the amount of capital banks must hold during cyclical upturns in the credit cycle, moving it back to 0% from 0.5% until at least June 2017.

Changes to the countercyclical buffer would have no bearing on the banks' need to access bond markets to raise subordinated debt as it is met with Common Equity Tier 1.

However, a delay in the implementation of European rules known as MREL (minimum requirement for own funds and eligible liabilities), a cushion of loss absorbing debt that would be bailed-in during bank crises, could provide more relief.

UK banks were expecting to receive their MREL numbers around now, though three sources said this could now be pushed back for some months as the regulator waits for the final European Banking Authority technical standards.

The implementation deadline of January 2020 could also be relaxed, the sources said.

That would prove a welcome respite for UK banks. Barclays (LSE: BARC.L - news) , for instance, has said it would issue £6bn of MREL/TLAC eligible debt per annum in the coming years.

Such a move would also give Barclays breathing room as it transitions its stack of opco debt to holdco debt to meet new regulatory standards.

While an MREL delay would be good news, the loosening of the countercyclical buffer is not expected to impact banks' issuance plans of Additional Tier 1 capital, which they must raise to meet minimum regulatory requirements.

RBS (LSE: RBS.L - news) said it had to raise £2bn in the format this year while Barclays has said it expects to be a measured issuer of AT1 and Tier 2 debt over the next few years.

Nonetheless, issuance of such debt is unlikely for now given that depressed prices make selling such bonds unpalatable.

UK AT1 bonds struggled to perform over the week and on Friday were quoted up to 2.5 points lower. A Barclays (Swiss: BARC.SW - news) £1bn 7.875% AT1 callable in 2022 was bid 89.5, for example, down from 92.1 on Monday.

WELL PREPARED While UK lenders are not off the hook when it comes to capital issuance, the loosening of regulatory capital requirements will be beneficial on other levels.

It will reduce regulatory capital buffers by £5.7bn, the BoE (Shenzhen: 200725.SZ - news) said, raising banks' capacity for lending to UK households and businesses by up to £150bn.

The countercyclical buffer is designed to enable banks to keep functioning in times of stress and is therefore acting exactly as it should, bankers said.

"There has been a feeling among some UK banks for many years that UK regulations were being gold-plated but at least this now means that they enter this uncertain period from a position of strength," said Simon McGeary, head of European new products at Citigroup (NYSE: C - news) .

The move is part of a broader package of measures announced by the BoE demonstrating the lengths to which it will go to support the financial sector, including over £250bn of additional funding for banks. Interest rate cuts are also anticipated.

"It's interesting to see them pull all three levers - monetary, fiscal and macroprudential," said another source. (Reporting by Alice Gledhill, editing by Helene Durand, Matthew Davies)