LONDON: The Bank of England took steps on Tuesday to ensure British banks keep lending and insurers do not dump corporate bonds during a “challenging” period that looks set to follow the country’s vote to leave the European Union.
Risks the central bank had anticipated before the vote are starting to materialise, policymakers said, including in commercial property where late on Monday insurer Standard Life had to halt withdrawals from its main British real estate fund.
The central bank also said it was closely monitoring investors’ willingness to fund Britain’s large current account deficit, as well as high levels of household debt and the subdued global economic outlook.
“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” the BoE said after its Financial Policy Committee held two meetings after the referendum.
Sterling dropped more than 10 percent against the dollar and banks’ share prices fell by a fifth after Britons unexpectedly voted on June 24 to leave the EU, prompting Prime Minister David Cameron to say he would step down.
Cameron’s ruling Conservative Party is now selecting a new leader, who will decide how soon and on what terms Britain will leave the EU after more than 40 years of membership.
The BoE’s Financial Policy Committee said it would reverse a decision it took in March to increase the amount of capital banks must hold against cyclical upturns in the credit cycle.
Holding the so-called counter-cyclical capital buffer (CCB) at zero until at least June 2017 would reduce banks’ capital requirements by 5.7 billion pounds, potentially freeing up an extra 150 billion pounds for lending, the BoE said.
Finance minister George Osborne told parliament on Monday he planned to meet the chief executives of Britain’s biggest banks the following day to discuss future action.
“The FPC stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on as needed, to support the supply of credit and in support of market functioning,” the BoE said.
The central bank has intensively monitored markets since June 24, in a way which was more intense even than during the 2008 financial crisis, some industry sources told Reuters.
After the initial market turmoil, British lenders showed only contained demand for central funds at a six-month liquidity auction last week, though on Thursday the BoE said the normally monthly auctions would continue weekly as a precaution.
Bank of England Governor Mark Carney also said his view was that the central bank would need to cut rates and possibly provide other stimulus over the summer to cushion the shock of voting to leave the EU.
But he added the BoE could not fully offset the shock, and before the referendum he warned that Britain risked slipping into recession if the country voted to leave.
British government bond yields have also fallen to record lows, hitting pension funds and insurers hard, as they struggle to generate returns to meet fixed liabilities.
The BoE said it would give insurers a longer period to adjust to new European Union capital rules so that they do not feel pressured to dump corporate bonds to avoid high capital charges as interest rates plunge.
“These measures smooth the impact of those regulations,” the BoE said.
Before the referendum consumer borrowing was rising at its fastest rate in a decade, while mortgage lending had eased slightly as higher taxes on landlords and second-home buyers took effect in April.
The central bank said it would keep a close eye on the buy-to-let mortgage sector, in case landlords sell up as property prices fall, as well as increasing numbers of vulnerable indebted households.
It also worried about a fall in investor demand for British assets – which could make it harder for the country to finance its large current account deficit – as well as trouble in commercial real estate making it harder for businesses to use their property as collateral to obtain loans.
Copyright Reuters, 2016
Courtesy : BRecorder