Jill Treanor 

Bank capital rules could be relaxed amid Brexit turmoil

Bank of England’s financial stability report to be published on Tuesday against backdrop of sharp falls in bank share prices
  
  

The Royal Bank of Scotland building in London.
The Royal Bank of Scotland building in London. Photograph: Shaun Curry/AFP/Getty Images

Mark Carney will this week spell out the financial risks sparked by the vote for Brexit in remarks that will be closely watched for any measures to help banks free up capital and keep loans flowing to businesses and households.

After warning that the risks around the referendum posed the “most significant near term” domestic risk to financial stability, the governor of the Bank of England indicated last week he was ready to take actions to ensure the fallout from the vote does not create conditions that could lead to a re-run of the credit crunch or the 2008 banking crisis.

This sparked speculation the Bank could use its twice-yearly assessment of risks to the financial system, due to be published on Tuesday, to unveil measures which could relax the amount of capital banks must hold. It could also encourage policymakers to reinvigorate a scheme intended to encourage banks to lend.

Carney referred to this week’s half-yearly risk assessment, known as the financial stability report (FSR), in his speech last Thursday, when most of the focus was on his remarks that an interest rate cut would be needed in the summer to stimulate the economy after the Brexit vote.

He spoke after chairing the quarterly meeting of the financial policy committee, which is responsible for producing the Bank’s regular reviews of financial stability. Tuesday’s FSR will be published against a backdrop of sharp falls in bank share prices and a plunge in the pound.

Since the referendum on 23 June, sterling has hit a 31-year low against the dollar. Shares of most the major banks also fell on concerns about the impact that even lower interest rates could have on their profitability at a time when economic growth is expected to slow sharply.

Carney mentioned the half-yearly assessment of financial risks in last week’s speech: “Next Tuesday, the independent financial policy committee will release its biannual assessment of risks in its financial stability report, and it will take any further actions it deems appropriate to support financial stability.”

One possibility is a temporary relaxation in the amount of capital banks are required to hold. Only at the start of the year, as the economy has recovered from the banking crisis, lenders had been ordered to hive off a part of their capital – known in banking jargon as “counter-cyclical capital buffers” – that could then be released in the event of a downturn. Bloomberg reported last week that Carney was considering allowing such a release. While this would free up only a small fraction of the amount of capital banks must hold, it could be regarded as a symbolic move to ease pressures on banks.

The funding for lending scheme, which was first introduced four years ago to provide cheap loans to banks in return to lending, could be given renewed vigour.

Economists at Investec said: “Tuesday’s financial stability report could prove to be significant, perhaps for a cut in the counter-cyclical capital buffer. The governor conveyed a concrete message that financial and monetary policy will act in the same direction. Presumably this applies to credit policy too, with the possibility of a widening and an extension in the funding for lending scheme.”

There are expectations that interest rates will be cut from their already historic low of 0.5% as part of the effort by the Bank and the government to cushion any economic downturn.

“UK policymakers are looking to leave no doubt in the minds of investors, businesses and consumers that they will do whatever they can to support the economy,” said Howard Archer, chief UK and European economist at IHS Global Insight.

He said Carney and the chancellor, George Osborne, who on Friday abandoned his austerity-driven aim to be running a surplus in 2020, were “looking to shore up confidence so as to try and limit cautious behaviour by businesses and consumers as they seemingly face a prolonged, very uncertain economic environment, that is currently being magnified by political turmoil”.

“There can be little doubt that part of the Bank of England’s package will be to cut interest rates from 0.50% to 0.25%, very possibly on 14 July,” said Archer.

He said he doubted rates would reach negative territory, citing the remark by Carney last week when he said: “As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”

 

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