The Bank of England has slashed its capital requirements for UK banks, paving the way for an extra £150bn to be pumped into the UK economy, in its latest efforts to stop the UK spiralling into a post-referendum crisis.
In a widely expected move, the Bank’s Financial Policy Committee (FPC) cut one of its extra capital requirements – the countercyclical capital buffer – from 0.5 per cent of a bank’s risk-weighted assets to zero. This gives banks the green light to reduce their capital holdings by £5.7bn, and unlocks a potential £150bn in loans to businesses and households in the real economy.
The Bank also said it could already see signs the UK economy was on the verge of a dramatic slowdown in the aftermath of the vote.
“A number of economic and financial risks are materialising,” the FPC said. It added: “There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.”
The FPC cited a host of concerns it would closely monitor, including the near-record current account deficit, the slowdown in commercial real estate, high levels of household debt and the potential for market liquidity to seize up over the coming months.
The Bank believes any one of these threats could turn into a serious challenge for the UK economy. It is particularly worried investors will lose their appetite for UK assets, which could put even more pressure on sterling.
Fears were also raised over “increasing numbers of vulnerable households” because of high levels of debt and the potential a crisis in the buy-to-let sector – whose fortunes are amplified by the business cycle, meaning they feel the boom-and-bust a little sharper – could hurt private renters.
The countercyclical buffer is designed to be reduced in times of economy stress, so today’s decision is a clear signal from the Old Lady its top policymakers are concerned uncertainty in the aftermath of the vote to leave the EU will paralyse the UK economy.
The FPC only announced the 0.5 per cent rate in March and had given lenders until next March to meet the requirements. At the time it was predicted banks would have to raise around £10bn under the system.
The cut will be welcomed by the City’s biggest banks, which have seen share prices fall by 20 per cent on average since the referendum as they gear up for a period of even lower interest rates and pressure on their bottom lines.
In cutting the requirement, the Bank made it absolutely clear where it wants the £150bn to go, stating: “The FPC strongly expects that banks will continue to support the real economy, by drawing on buffers as necessary.”
Governor Mark Carney confirmed the Bank will ensure "no banks increase dividends or distributions to shareholders" as a result of looser capital requirements.
He stressed that three-quarters of UK lenders, accounting for 90 per cent of the value of all lending, “will, with immediate effect, have greater flexibility to maintain their supply of credit to the real economy,” the Bank added.
Last week, Carney insisted he would like to see interest rates cut over the summer. Markets are pricing in rates hitting zero by the end of the year, and Standard and Poor’s (S&P) predicted there would be another bout of quantitative easing unleashed next year.