UK tightens credit rules for banks after Brexit resilience
london — The Bank of England tightened its controls on lending on Tuesday and said it was likely to make British banks hold an extra 11.4 billion pounds ($14.5 billion) of capital as it decided the risk of a big hit to the economy from the Brexit vote had passed.
After the referendum decision to leave the European Union a year ago, the BoE cut to zero a requirement that banks create a capital buffer as it sought to offset an expected drying up of lending.
But Britain’s economy has performed more strongly than expected since the vote, despite some more recent signs of a slowdown. Some of the central banks’ interest rate setters think it is already time to raise its main interest rate.
On Tuesday the BoE’s separate Financial Policy Committee declared that overall risks to Britain’s economy from its financial system were at a “standard” level.
The FPC raised its counter-cyclical capital buffer (CCyB) — which rises and falls along with the ups and downs of the economy — to 0.5 per cent from zero with a one-year implementation phase. It said that it expected to raise it further to one per cent in November.
This 1 per cent is the level that reflects an economy that is running normally.
Bank shares fell after the BoE announcement but recovered soon after to their levels earlier on Tuesday.
The BoE also said it was concerned that lenders were placing undue weight on recent low losses which could only be achieved in the current benign conditions.
“As is often the case in a standard environment, there are pockets of risks that warrant vigilance,” the BoE said.
The BoE said it was continuing to oversee banks’ preparations for Brexit, including for the possibility of Britain leaving the EU in 2019 without securing any trade deal, cutting off banks from their European customers which could undermine financial stability.
“Such scenarios are where contingency planning and preparation will be most valuable,” the BoE said.
Each 0.5 percent increase adds 5.7 billion pounds to British banks’ capital requirements, though many banks already hold capital in excess of the minimum so may not need to raise fresh funds. — Reuters