The Bank of England’s (BoE) Financial Policy Committee has eased restrictions on UK banks, releasing up to £150bn (175.8bn) for bank-backed consumer and corporate lending.
A post-Brexit report from the FPC said that economic risks were beginning to ‘crystallise’ and that it had acted so that the country could continue to borrow and lend.
The FPC’s action has reduced regulatory capital buffers by £5.7bn and therefore raises banks’ capacity to lend to UK businesses and households by up to £150bn.
BoE governor Mark Carney said: "For comparison, last year, with a fully functioning banking system and one of the fastest growing economies in the G7, total net lending in the UK was £60bn.
"This is a major change. It means that three quarters of UK banks, accounting for 90% of the stock of UK lending, will immediately have greater flexibility to supply credit to UK households and firms."
BoE explicitly states risks to lending economy
Carney also set out some of the risks that the FPC had touched upon in March during the politicised campaign period, during which point it said "the risks around the referendum [were] the most significant near-term domestic risks to financial stability".
Carney said that some of those risks have begun to ‘crystallise’:
- The concerns that the historically large current account deficit could be vulnerable to sudden shifts in foreign capital and sharp adjustments in sterling are being vindicated. "Portfolio flows into UK equities and corporate 2 debt appear to have slowed, and sterling experienced its largest two-day fall against the dollar since floating exchange rates were re-introduced nearly fifty years ago," said Carney.
- It is now more likely that adjustments in commercial real estate could tighten credit conditions for UK businesses. "Foreign flows of capital into commercial real estate fell 50% in the first quarter of 2016, transaction volumes have fallen further during the second quarter, and share prices of property REITs dropped sharply following the referendum," said Carney.
- The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. "…there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity," said Carney.
However, in a positive turn, Carney said sterling’s sharp depreciation should provide support to UK exporters, and that the fall in gilt yields has meant that all-in corporate borrowing costs actually fell modestly over the course of last week.
"In addition, financial markets have managed the volatility around the referendum well and have not added to stress," he said.