The Bank of England lowered capital requirements for UK banks Tuesday in an effort to shore up the UK economy, saying that it “strongly expects” banks to support the economy with fresh loans in the wake of Brexit.
In its first official easing act, the Financial Policy Committee lowered the countercyclical-capital buffer rate for UK exposures to zero from .5% of risk-weighted assets in a move that it said would raise the capacity for bank lending to households and businesses by as much as £150 billion. “This action reinforces the FPC’s view that all elements of the substantial capital and liquidity buffers that have been built up by banks are to be drawn on, as necessary” the committee said in a statement.
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The BOE’s decision marks one of the first instances of a major central bank deliberately lowering bank capital requirements to maintain growth in credit to offset an economic shock. Lower capital requirements allow banks to finance loans and other assets with more borrowing and less equity.
The bank’s move will be closely watched as a test case of the new “macroprudential” regulatory regime adopted in the U.K. and other advanced economies after the financial crisis. The BOE gained broad new powers over the financial system and an explicit goal of safeguarding financial stability. It has spent the past few years bolstering lenders’ financial strength.
Officials warned Tuesday that the stability of the U.K. financial system faces multiple threats in the wake of the Brexit vote. The BOE said it has already detected signs in stock markets and commercial real-estate markets that foreign investors are pulling money out of the U.K. A real-estate fund managed by Standard Life Investments on Monday suspended withdrawals following a spate of redemption requests.
The BOE said some overstretched households might struggle to service their debts if the economy lurches downward. And officials warned that the outlook for the global economy has darkened.
Still, officials stressed the financial system is stronger now than it was in 2008 and 2009, when British taxpayers had to bail out stricken lenders and credit dried up. They also flagged that banks have parked collateral with the BOE sufficient to access more than £250 billion of funding if they need it.
“The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging” the report said, identifying five channels through which the referendum could increase risks to financial stability.
From the report:
The Committee had identified the following channels through which the referendum could increase risks to financial stability:
- the financing of the United Kingdom’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;
- the UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;
- the high level of UK household indebtedness, the vulnerability to higher unemployment and borrowing costs of the capacity of some households to service debts, and the potential for buy-to-let investors to behave procyclically, amplifying movements in the housing market;
- subdued growth in the global economy, including the euro area, which could be exacerbated by a prolonged period of heightened uncertainty;
- fragilities in financial market functioning, which could be tested during a period of elevated market activity and volatility.
“The FPC stands ready to take any further actions deemed appropriate to support financial stability,” the panel said, which of course precisely what the market is ultimately looking – the assurance that if ever anything does happen central banks will jump in at a moments notice.
And since this was the Mark Carney’s first official easing act, UK stocks took it in stride and have not only pared all overnight losses but were up 0.6%, trading at session highs, while U.K. bank shares cut losses after Bank of England Governor Mark Carney cut their capital requirement to zero to raise capacity for lending. The FTSE 350 Banks index had lost as much as 1.2 percent before and was trading fractionally in the green as a result of this latest central bank intervention.
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