​BoE to ease banks' capital rules if Brexit threatens financial stability

2018-12-06 09:12

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The Bank of England (BoE) confirmed on Wednesday that it will ease rules on capital holdings for banks if Brexit threatens a liquidity crisis.

The decision by the BoE sees it stand ready to bolster the British economy by lowering the countercyclical capital buffer (CCyB), a mechanism which ensures that banks have billions of pounds worth of liquid capital to deploy if there is a shock or a threat to the stability of the financial system.

The BoE regulates financial markets and guards against systemic threat to banks, in a system introduced to avoid a repeat of the financial crisis of 2007-9, through its Financial Policy Committee (FPC).

The CCyB allows the FPC to adjust the resilience of the banking system, increasing the CCyB when it judges that risks are building up.

Banks must then have an additional cushion of capital with which to absorb potential losses, enhancing their resilience and contributing to a stable financial system.

The BoE would lower this rate, currently set at 1 percent of assets, freeing capital to be lent.

The last time the CCyB was cut was in the month after the June 2016 Brexit referendum set Britain on a path to leave the European Union (EU), in a preemptive move to avoid severe negative shocks to the economy.

"If an economic stress were to materialise, the FPC would be prepared to cut the UK CCyB rate, as it did in July 2016," according to the record of the November meeting of the FPC, which was released on Wednesday.

The move the FPC has signalled it could take after the formal Brexit date of March 29 could see the CCyB cut to zero percent.

This would allow banks to deploy up to 250 billion pounds (318 billion U.S. dollars) worth of capital if a disorderly Brexit threatened economic stability.

The BoE reported last week in its biannual Financial Stability Report (FSR) that it had run a series of stress tests on the British financial system.

According to the BoE these tests modelled scenarios more severe than a disorderly Brexit, and all seven of the major British lending banks passed the test -- the fir

BoE governor Mark Carney said in a letter to Chancellor of the Exchequer Philip Hammond on Wednesday that the financial system was now stronger than at any time since the global financial crisis with capital ratios nearly three and a half times higher than at that time.

"Despite facing loss rates consistent with the global financial crisis in the stress test, the major UK banks' aggregate CET1 capital ratio after the stress would still be twice its level before the crisis," Carney said.

Since the financial crisis, major UK banks have substantially reduced their reliance on wholesale funding, said Carney, and they now held more than 1 trillion pounds of high-quality liquid assets.

He said: "Combined with banks' own prudent risk management, this liquidity means that the major UK banks are in the position of being able to meet their maturing obligations for many months without any need to access wholesale funding or foreign exchange markets."

Carney warned that in a disorderly Brexit, "some market volatility would be expected", but like that in the wake of the EU referendum in 2016, sterling markets were able to function effectively through markedly volatile periods.

"The strength of the core financial system, including banks, dealers and insurance companies supports the markets on which the economy relies," said Carney. "The BoE... has put extensive contingency plans in place to support institutional resilience and market functioning during any period of heightened uncertainty." (One pound = 1.28 U.S. dollars)
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