BOE buffer could absorb the shock of Brexit but growth is the problem
The first element in the Bank of England’s post-Brexit operation was obvious. Banks will be told to use their capital buffers for the purpose for which they were intended – to absorb shocks.
It will have required no genius, or even lateral thinking, on the part of the Bank’s financial policy committee to reach this decision. The financial system established after the crisis of 2008-09 is designed to flex in emergencies. An emergency – in the form of “challenging” financial conditions and a possible drought in foreign capital heading to the UK – has materialised. So pull the appropriate lever.
Nor should one be sniffy about the significance of the Bank’s manoeuvre. Reducing banks’ countercyclical capital buffers from 0.5% to 0% may sound a modest tweak but the effect is to release £5.7bn of capital, enough to support an extra £150bn of lending, said the Bank’s governor, Mark Carney. For comparison, he said total net lending in the UK last year was £60bn.
Those statistics are reassuring. If you are running a business wishing to capitalise on the 10% fall in the value of sterling against the dollar – an exporter, say – you should be able to secure bank finance if you have a viable investment plan.
What’s more, supplies of credit should remain comfortable for the foreseeable future. Banks’ balance sheets have been tested against scenarios “far more severe than the country currently faces”. Lenders’ funding costs have not risen after the referendum. And the Bank’s policeman will prowl the neighbourhood to ensure lenders don’t slip the freshly released cash out of the back door in the form of unearned dividends for shareholders or bonuses for well-fed executives.
Jolly good, it sounds like a plan. Or, rather, half a plan. Will households and businesses actually want to borrow more in the current climate? Avoiding a 2009-style credit crunch is almost the easy part. The harder part is to stimulate confidence when sterling may not have reached its post-Brexit floor – it hit $1.30 on Tuesday – and clarity on the terms of the UK’s exit from the EU could be two years away.