Bank of England Acts to Keep Banks Lending Through 2021

The Bank of England took steps on Friday to keep banks lending through 2021 as Britain deals with the COVID-19 pandemic and a big change in its trading relationship with the European Union.

The central bank said the counter-cyclical capital buffer – extra money banks must set aside during economic good times – would be held at zero until at least the last quarter of 2021.

Banks would not need to implement any future change until the end of 2022, and should use this flexibility to underpin lending to the rest of the economy, the Bank of England (BoE) said.

“Cutting support to the economy to avoid the use of capital buffers would be costly for the wider economy and consequently for banks themselves,” the BoE said.

Banks would face challenges next year from higher unemployment and business insolvencies but were well prepared, the BoE said.

“The major UK banks can absorb credit losses in the order of 200 billion pounds, much more than would be implied if the economy followed a path consistent with the Monetary Policy Committee’s central forecast,” it added.

On Thursday, the BoE announced it would allow banks to restart paying dividends and executive bonuses.

The BoE forecast last month that Britain’s economy would shrink by 11% this year as a result of the pandemic and grow by 7.25% in 2021, taking until the first quarter of 2022 to return to its pre-crisis size.

Unemployment was expected to peak at 7.8% in the second quarter of next year.

However, the central bank warned of downside risks from the pandemic and new trade restrictions with the EU that take effect on Jan. 1, and repeated that financial market volatility could arise even though the broader financial system was stable.

“Market volatility could be reinforced in the event that some derivative users are not fully ready to trade with EU counterparties or on EU or EU-recognised trading venues. Financial institutions should continue taking measures to minimise disruption,” it said.

The BoE also reiterated that it did not plan a post-Brexit relaxation of financial standards.

“Irrespective of the particular form of the UK’s future relationship with the EU … the Financial Policy Committee remains committed to the implementation of robust prudential standards in the UK,” it said.

Writing by David Milliken, editing by Andy Bruce and Mark Potter

Source: Reuters

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