UK banks can deal with deeper shock than Covid-19, Bank of England says

Banks in the UK can deal with a shock that is much worse than economic problems caused by Covid-19 and still continue to lend, the Bank of England has found.

The country’s biggest lenders have enough capital buffers to get them through the crisis, after building them up since the 2008 financial crisis.

The Bank’s Financial Policy Committee also said that it would allow lenders to reduce their so-called countercyclical capital buffer – a type of rainy day fund – to 0% for at least another year.

This will give lenders confidence that they can reduce the buffer without then being required to jack it up when officials say so.

The committee also said that most risks of a potential no-deal Brexit to the UK’s financial stability have been mitigated. The financial system has had time to prepare for potential Brexit outcomes.

It said: “Financial stability is not the same as market stability or the avoidance of any disruption to users of financial services.

“Some market volatility and disruption to financial services, particularly to EU-based clients, could arise.”

The committee said: “Reflecting the extensive preparations by UK authorities and the financial sector, the FPC … continues to judge that most risks to UK financial stability that could arise from disruption to the provision of cross-border financial services at the end of the transition period have been mitigated.”

The central bank added that ahead of a potential no-deal Brexit, most risks to the UK’s financial stability have been mitigated, but warned that “some disruption to financial services could arise”.

The December report would normally include an annual stress test. However in March the Bank decided to cancel the test for the first time since it was launched in 2014. Resources were needed to support businesses through the pandemic.

Last year the Bank found that all of the top lenders in Britain would be able to weather the worst-case scenario, which simulated a no-deal Brexit or a financial crisis which cut deeper than the 2008 crash.

Now, a year later, it looks like both these scenarios could be realised.

Brexit talks are set to come to a crunch this weekend, with a no-deal still on the table.

Meanwhile, the Covid-19 pandemic pushed the economy to its worst quarter since records began in 1955 earlier this year, shrinking GDP by more than 20%.

So far banks have been keeping money flowing to millions of British businesses. Despite some complaints from business owners, the lenders have pumped more than £65 billion into the economy as part of three Government-backed loan schemes.

Unlike 2008, the banks have not seemed to show any major strain from the exercise. The risk they are taking is smaller than for usual loans, as the Government has promised to cover the bank between 80% and 100% of the loan amount if the borrower is unable to pay.

In October governor Andrew Bailey told lenders that their “capital buffers are there to be used”, amid fears that bank bosses might be holding on to the cushions.