Thursday 27 July 2017

BoE lifts capital buffer for UK banks

Bank of England Governor Mark Carney said the change set by its Financial Policy Committee did not point towards a tightening of monetary policy. Photo: PA
Bank of England Governor Mark Carney said the change set by its Financial Policy Committee did not point towards a tightening of monetary policy. Photo: PA

David Milliken

The Bank of England tightened its controls on bank credit to more normal levels yesterday, deciding the risk had passed of a big hit to the UK economy and to lending.

The BoE's Financial Policy Committee (FPC) said British banks must now hold £5.7bn (€5.03bn) between them as an additional buffer against bad times, and that it will probably double that in November.

After voters decided to leave the European Union a year ago, the FPC cut to zero a requirement that banks create an extra capital buffer as part of a broad range of stimulus measures to help the country cope with the shock. But the economy has performed more strongly than expected since the referendum, despite some recent signs of a slowdown.

Some of the central banks' interest rate-setters now think it is time to raise its main interest rate.

BoE Governor Mark Carney said the FPC's action did not in itself imply that monetary policy was also about to tighten.

"Monetary policy is the last line of defence to address financial stability issues," Mr Carney said. "In that regard, we don't need monetary policy to do our job. In fact, by doing our job we allow monetary policy to focus on its job which is returning inflation sustainably to target in an exceptional period."

British inflation is above the BoE's target at 2.9pc and is set to rise higher as sterling's fall since last year's Brexit vote feeds through into prices.

Mr Carney expects this will be temporary but other policymakers say it could have a lasting impact and want to lift interest rates off their record low.

The FPC declared that risks to Britain's economy from its financial system were back at a "standard" level and that banks should set more money aside in case of a future downturn.

To do that, the FPC raised its counter-cyclical capital buffer (CCyB) - which rises and falls along with the ups and downs of the economy - to 0.5pc from zero, with a one-year implementation phase. It expects to raise the buffer to 1pc in November, the level that reflects an economy that is running normally.

The BoE also said regulators would publish tighter rules on consumer lending next month and it would bring forward to September from November its checks on whether banks could cope with consumer loans losses.

JP Morgan economist Allan Monks said the BoE's move yesterday was modest and probably reflected signs that consumer lending has already started to slow after growing at its fastest pace in 11 years in late 2016.

"The BoE's response to the strength in consumer lending was towards the milder end of the range of potential outcomes," he said.

Bank shares fell after yesterday's BoE announcement but quickly recovered to their levels earlier on Tuesday.

Meanwhile, Britain will set up a new Brexit advisory group bringing together business leaders and senior ministers to hear the views of major companies, many of which have felt ignored over the government's stance on leaving the EU.

But the move stops short of the regular direct access to the prime minister, which was enjoyed by a number of firms under a previous advisory group set up by David Cameron when he was prime minister but disbanded by his successor. (Reuters)

Reuters

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