The Bank of England has warned lenders that reducing their support to households and businesses “would be costly” for the economy and for banks themselves.
It came as the Bank’s Financial Policy Committee (FPC) said the UK’s lenders were strong enough to weather the rest of the coronavirus storm – even if unemployment soared to 15 per cent.
However, the FPC said that “a range of near-term risks” remain. They include market volatility resulting from Covid cases and restrictions; the transition to life outside the EU; and geopolitical risks.
New government restrictions in response to rising coronavirus cases prompted chancellor Rishi Sunak to announce more support for the economy last month. He extended the application deadline for government-backed loan schemes, among other measures.
However, some companies have reported difficulties in getting loans and claimed that banks are reducing access.
The Bank of England said today that UK firms have raised over £75bn in additional financing from banks and markets during Covid. It said this was “in large part” through coronavirus loan schemes.
Bank: Capital buffers there to be used
The FPC’s financial stability report said banks were strong enough to keep up Covid lending.
“The UK banking system remains resilient to a very wide range of possible economic outcomes,” it said. “It has the capacity to continue to support households and businesses.”
In March, the Bank reduced the “capital buffers” banks have to hold to ensure they can withstand shocks. The BoE today reminded lenders that capital buffers “exist to be drawn down in stress”.
The FPC warned that “cutting support to the economy to avoid the use of capital buffers would be costly for the wider economy and consequently for the banks themselves”.
Speaking at an online event earlier in the day, BoE governor Andrew Bailey said capital buffers were in place to be used during a crisis like coronavirus.
Potential for disruption from Brexit
The FPC’s report said most risks to the financial sector arising from Britain leaving the EU “have been mitigated”.
Yet it said financial services firms and investors could face disruption, in particular from EU rules. To try to avoid this, many firms that use London as a gateway to EU markets have set up or expanded in the bloc.
However, the FPC said: “The number of clients actively trading in the new entities is materially lower. Some operational risks therefore remain, including if many clients seek to migrate to the EU entities in a short period of time. These could amplify market volatility.”
Bailey earlier urged both sides to reach an agreement. “I’m surprised that the EU wants to restrict where their citizens can do business. We will certainly keep our markets open to the world,” Bailey said in an interview with the Yorkshire Post.
The FPC also said there was a need to examine the “dash for cash” that shook markets in March. The Bank had to provide heavy support to markets as investors sold stocks, bonds, and other assets in favour of holding cash.
It said the mismatch between the liquidity of assets held in open-ended funds was one area of concern. Another was demands of non-bank financial intermediaries for liquidity in stress.