Brexit challenge: Bank of England eases rules for banks

Says risks before UK referendum have started to materialise

LONDON: The Bank of England took steps on Tuesday to ensure British banks keep lending and insurers do not dump corporate bonds in the “challenging” period that is likely to follow the country’s vote to leave the European Union.

The central bank said risks it had identified before the referendum were starting to materialise, including lower demand for commercial property. Late on Monday, insurer Standard Life said it had halted 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 after the shock outcome of the vote, as well as high levels of household debt and the subdued global economy. “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 June 23 referendum.

Sterling dropped more than 10 percent against the dollar and banks’ share prices fell by a fifth after Britons unexpectedly voted on June 23 to leave the EU, prompting Prime Minister David Cameron to say he would step down.

Sterling touched a new, 31-year low against the US dollar earlier on Thursday, hurt by Standard Life’s suspension of trading in its British real estate fund. Twenty and 30-year British government bond yields briefly touched new record lows of 1.473 percent and 1.606 percent after the BoE’s announcement.

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. With uncertainty about the future of George Osborne as finance minister, more responsibility has fallen on Bank of England Governor Mark Carney and his fellow BoE policymakers to steer Britain through its worst political crisis in decades.

Fresh signs of weakness in Britain’s economy appeared on Tuesday. Confidence among businesses fell sharply in the data after the vote to leave the EU, a survey showed, and retailer John

Lewis said its sales grew more slowly last week. Britain’s dominant services industry also grew at its slowest pace in three years in June, according to a survey conducted mostly before the referendum.

BoE eases capital requirement

As part of its announcement on Tuesday, 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 Osborne told parliament he planned to meet the chief executives of Britain’s biggest banks 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.

Published in The Express Tribune, July 6^th, 2016.

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