UK Edition
Bank of England mulls ordering banks to raise buffers against disorderly Brexit
Banks could be ordered to set aside another £5bn to guard against the risk of a disorderly Brexit which threatens to cut finance firms off from their continental customers, the Bank of England has said.
Officials are already making banks increase the countercyclical capital buffer (CCyB), a fund which is built up in the good years and can be used in bad times to ensure banks are safe and can carry on lending when times get tough.
But Brexit adds in an extra element of uncertainty. The Financial Policy Committee (FPC), which is headed by Mark Carney, has decided not to hike the rate further to reflect Brexit just yet, but will consider doing so next year.
The CCyB is rising from 0.5pc of banks’ risk-weighted assets to 1pc, reflecting the relatively “normal” risk conditions faced at the moment. This puts the CCyB at £11.4bn.
The Bank of England stress tested banks’ finances to see how they could cope with a major recession, and found they have enough capital to survive and to keep lending. But a disorderly Brexit on top of such a crunch could be more dangerous.
“In such circumstances, capital buffers would be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy,” according to the record of last month’s FPC meeting.
“The Committee therefore debated the merits of increasing the UK CCyB rate above 1pc at this juncture.”
This would help keep banks safe, the committee said.
“On the other hand, the likelihood of a disorderly Brexit occurring in combination with both a severe global recession and very substantial additional conduct costs (as in the stress test) could be seen as extremely remote; if that were the case, the potential economic costs to ensuring the banking system was resilient to this combination of risks could exceed the benefits,” the FPC said.
An extra hike would also take banks by surprise which would not be desirable, the FPC said.
“The FPC agreed that, when making its decisions on the UK CCyB rate during the first half of 2018, it would reconsider the adequacy of a 1pc UK CCyB rate in light of the evolution of the overall risk environment," the record said.
The Bank of England has also alerted the High Court that it might face extra demand from insurance companies preparing for Brexit.
Depending on the result of negotiations with the EU, the finance firms might need to set up new entities in the correct locations, and transfer contracts to those new entities.
“The UK process of transferring insurance contracts relied on a court procedure that could take 12-18 months; given the volume of these applications was expected to be three to five times the normal level, there was a risk that transfers would not be completed in time,” the FPC minutes said.
“The PRA [Prudential Regulation Authority] and FCA had been working to ensure that firms' plans were as robust as possible, and the Bank had written to the High Court to alert them to the potential for increased applications.”