Bank of England orders lenders to put money into rainy day fund

UK banks will be asked to set aside cash to absorb any future shocks, as the Bank of England said that economic risks have returned to their pre-pandemic levels.

Banks will have to set 1% of their capital aside as part of the so-called countercyclical capital buffer, following the Bank’s decision on Monday.

The Bank slashed the buffer to zero in the early days of the pandemic, freeing up the money that the banks had previously set aside to cover shocks.

The 1% buffer is still behind where it had been set before the pandemic, but the Bank could decide to hike the level to 2% in the second quarter of next year if the economic recovery continues.

The 1% buffer, which requires banks to set aside around £11 billion, will come into force in a year’s time. Any further increase would happen in 2023.

“This decision reflects the fact that risks have returned to their pre-Covid level. Major UK banks already have sufficient capital to meet this increase,” the Bank said in a report.

“The UK banking system has weathered the pandemic well,” said Bank of England Governor, Andrew Bailey.

“UK banks’ capital and liquidity positions remain strong, and they have sufficient resources to continue to support lending to the economy.”

There continues to be uncertainty and the economy might need more support from the financial system in future, Mr Bailey said.

The banks have not suffered the losses that might have been expected during the pandemic.

They will also be able to survive and keep lending even if the economy suffers another downturn, according to a stress test that was performed by Bank of England officials in recent months.

The Bank assessed what would happen to lenders if there is a big dip in gross domestic product (GDP), a hike in unemployment and no new Government support measures.

It found that all eight banks that took part in the exercise would be resilient in such a scenario.

In its Financial Stability Report, the Bank also warned that while cryptocurrencies currently pose limited direct risks to the UK’s financial stability, their rapid growth could change this in time.

“The FPC (Financial Policy Committee) is vigilant to the financial stability risks (that) crypto assets could pose,” the report said.

“It will look to ensure the UK financial system is resilient to risks that may arise from these markets.”

The total market value of crypto assets has grown tenfold in the last year, Mr Bailey said.

He added: “Direct risks to the UK financial system from crypto assets are currently limited, however, at the current rapid pace of growth, and as these assets become more interconnected with the wider financial system, crypto assets will present a number of financial stability risks.”

He said: “It probably isn’t a financial stability risk today, but it has all the makings of something that could become one.”

Mr Bailey’s deputy, Jon Cunliffe, said that it is important to establish now what rules banks must abide by if they want to use crypto assets.