The Bank of England took steps on Friday to keep banks lending through 2021 as Britain deals with the COVID19 pandemic and a big change in its trading relationship with the European Union.
The central bank said the countercyclical 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 Committees 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 Britains 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 precrisis size.
Unemployment was expected to peak at 7.8 in the second quarter of next year.
However, the central bank warned of…