The Bank of England (BoE) announced a new measure on Tuesday to soften the financial fallout from the U.K.’s vote to leave the European Union (EU) last month.
The counter cyclical capital buffer rate for U.K. banks was cut with immediate effect to 0 percent from 0.5 percent of financials’ U.K. exposure, the BoE said on Tuesday in its biannual Financial Stability Report – the first to be published since the Brexit vote. This will reduce regulatory capital buffers by £5.7 billion ($7.5 billion), raising banks’ capacity to lend to households and businesses by up to £150 billion.
The Bank of England (BoE) announced a new measure on Tuesday to soften the financial fallout from the U.K.’s vote to leave the European Union (EU) last month.
The counter cyclical capital buffer rate for U.K. banks was cut with immediate effect to 0 percent from 0.5 percent of financials’ U.K. exposure, the BoE said on Tuesday in its biannual Financial Stability Report – the first to be published since the Brexit vote. This will reduce regulatory capital buffers by £5.7 billion ($7.5 billion), raising banks’ capacity to lend to households and businesses by up to £150 billion.
The BoE said risks identified in March ahead of the referendum had “begun to crystallize.”
“The current outlook for U.K. financial stability is challenging,” the Financial Stability Report said.
“There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the United Kingdom to establish new relationships with the European Union and the rest of the world. Some market and economic volatility is to be expected as this process unfolds.”
Challenges ahead may include lower investor demand for U.K. assets, the BoE said.
A decline in capital inflows could be associated with downward pressure on the exchange rate and tighter funding conditions for U.K. borrowers. It might also rock the U.K. commercial real estate market, which has previously experienced strong inflows from overseas. Foreign inflows of capital to U.K. commercial real estate fell by almost 50 percent in the first quarter of 2016, the BoE said.
It also warned that the U.K.’s highly leveraged households might struggle to repay debts should employment and income growth fall in the months following the referendum – as widely warned.
Last week, the BoE announced it would extend its indexed long-term report operations on a weekly basis until the end of September 2016 to provide extra liquidity insurance to banks.
Sterling barely moved after the release of the report on Tuesday morning but had already hit a new 31-year low against the dollar during the morning session. Shares of U.K. banks like Barclays surged higher after the news.
Outside of the U.K., the BoE flagged rapid credit growth in China as a risk to financial stability, along with a decline in global investors’ risk appetite and further appreciation in the U.S. dollar.
“Although spillovers to date have not been widespread, a prolonged period of uncertainty associated with the referendum could affect the global economy, particularly the euro area,” the BoE added.
The 19-country euro zone accounts for around two-fifths of U.K. trade and around one-third of U.K. foreign direct investment, the BoE said – although Brexit campaigners say the U.K.’s trading links with countries outside Europe will strengthen as a result of the vote.
Major U.K. banks’ exposure to the euro area amount to around 200 percent of their core equity capital, the BoE said.
Shares of banks headquartered in the euro zone fell sharply in the wake of the Brexit vote. The equity prices of banks in Spain and Italy – which are struggling with still-large debt piles – fell by 15 percent and 27 percent respectively in the week after the Brexit vote, according to the BoE.
