The Bank of England’s Financial Policy Committee is charged with looking after the stability of the UK financial system, and has released its first Financial Stability Report since the EU referendum.
It raises a number of risks looking forward, including:
• Potential softening in commercial property values
• Increasing numbers of households who’ll struggle (or stop spending) if the economy weakens, and
• A danger of buy-to-let investors tending to exacerbate movements in the property market.
All of which are fairly unsurprising in the face of uncertainty about how and when the UK will ultimately leave the EU.
Much of the report focuses on the need to monitor these elements as the situation develops: the Bank is flagging potential risks, with emphasis on the “potential”, and seeking to reassure the markets (and you, and me) that it’s well prepared for whatever comes along.
Nonetheless, the one piece of immediate action from this report is striking. In the FPC’s own words it
“...reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures with immediate effect...This action reinforces the FPC’s expectation that all elements of the substantial capital and liquidity buffers that have been built up by banks are able to be drawn on, as necessary. It will reduce regulatory capital buffers by £5.7 billion, raising banks’ capacity for lending to UK households and businesses by up to £150 billion.”
This “countercyclical capital buffer” is additional funds the banks are required to build up during stable periods, that can be accessed quickly should the need arise. It is, in the old cliché, a means of fixing the roof while the sun’s shining.
Now, the Bank of England seems to be saying, although no storm has yet hit, still maybe it’s time to get off the roof.
Financial Stability Report