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 release £5.7bn from the buffer, in which it requires banks to accumulate capital in good times to draw down in bad, and 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.
As the FT adds, the BOE also reminded banks that capital and liquidity buffers put in place during the financial crisis are there to be run down in stressed conditions. In exchange, banks are on notice from the BoE’s Prudential Regulation Authority that they are not to increase dividends and other distributions. The moves came as the pound hit a new post-referendum low amid rising concerns over the UK property market following a decision by Standard Life to halt redemptions on one of its flagship sector funds. Sterling fell 1.8 per cent to $1.3113, passing the $1.3118 nadir it reached on June 27.
In its Financial Stability Report published on Tuesday, the BoE also revealed that insurers had been allowed some flexibility by the watchdog around new EU laws that took effect at the beginning of the year in an attempt to stop a fire sale of risky corporate bonds as insurers try to meet their liabilities in a low-interest rate environment.
“There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the UK to establish new relationships with the European Union and the rest of the world. Some market and economic volatility is to be expected as this process unfolds,” the BoE’s financial stability report read.
Mark Carney, Bank governor, conceded at a press conference that the efforts of the central bank will not “fully and immediately” be able to offset market and economic volatility following the UK’s vote to leave the EU. He added that the FTSE 250 index of largely domestically-focused stocks gave a better sense of investors’ expectations for the UK economy than the FTSE 100, and added that the economy is likely to slow even with a drop in sterling that may help exporters.
More from the WSJ:
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.