Central bank eases capital rules on lenders just as it warns of risk of “sharp correction” in US tech stocks amid fears it could be a bubble that will burst
The Bank of England has paved the way for the biggest loosening of rules on lenders since the 2008 financial crash.
Its Financial Policy Committee proposed to reduce the amount of reserves banks must set aside to protect against collapse. The hope is banks will then increase lending to households and businesses, and boost the economy.
Yet it came as the Bank of England also warned about a “sharp correction” in the value of mostly US tech firms, amid growing fears of an artificial intelligence bubble.
It also said UK share prices are close to the “most stretched” they have been since the 2008 global financial crisis. Bank Governor Andrew Bailey defended the easing of capital rules just as stock market jitters grow.
“We have been through some very, very substantial economic shocks in recent years and the banking system has come through this robustly,” Mr Bailey told a press conference. ”We think it is perfectly reasonable and sensible to reach the conclusion we have today.”
He also denied the Bank was sowing the seeds of another financial crisis, or not learning from mistakes in the run-up to the meltdown 17 years ago. “I don’t think we have any concerns in terms of where it takes the regulatory system,” he said. “I think it is the sensible thing to do.”
Mr Bailey insisted it was “not for us to dictate” what banks did with the freed-up fund, amid questions over whether they would dish it out in bumper dividends to investors rather than boost lending.
”But I would emphasis that this is a two-way relationship here and if the banks support the economy by lending that will strengthen the economy, the banks will benefit from that in terms of their returns.”
Under the proposals, the new capital requirements for banks will be lowered from about 14% to 13% of what is known as their risk-weighted assets.
This refers to the amount that banks must set aside as a buffer against risky lending and investments, to cushion against any losses. The rules were introduced in the aftermath of the 2008 financial crisis to help prevent banks from excessive risk-taking and protect them from failure.
UK banks typically have less risk on their balance sheets now than since the beginning of 2016, the FPC found in its review. The FPC said its updated requirements were in line with its view that the UK banking system is resilient and can support households and businesses even if economic conditions got substantially worse.
Russ Mould, investment director at investment platform AJ Bell, said: “The UK banking sector has passed the Bank of England’s stress test with flying colours. The industry and authorities learned some valuable lessons from the global financial crisis in 2008 and banks have subsequently become stronger entities.
“No-one wanted a repeat of what happened 17 years ago when various banks had to be bailed out. That crisis led to UK banks being pushed to have more capital to withstand any shocks. The latest stress test means that major UK banks would be able to cope with a severe decline in the economy and provide ongoing support to consumers and businesses.
“Admittedly, the Bank’s Financial Policy Committee says threats to financial stability have increased this year, and it flags the risks of a sharp correction to financial markets given stretched US equity valuations.
”However, it says UK house and corporate indebtedness remains low. Importantly, the stress test results have given the Bank of England confidence to cut its estimate of how much capital banks need to hold. The government will no doubt welcome this news, given its desire to encourage more lending to drive economic growth.”
