BOE discusses risks of lowering banks’ buffers

Bloomberg

Bank of England financial-stability officials discussed the risk that freeing UK banks to lend more may prompt them to reward investors instead.
In the record of meetings held in the wake of Britain’s vote to leave the European Union, the Financial Policy Committee — lead by Governor Mark Carney — said the stability-risk outlook had “materially changed” and agreed to cut the countercyclical-capital buffer to “reduce pressure” on UK lenders. None of the FPC members present at the meeting dissented on the decision to lower the buffer to zero from 0.5 percent of risk-weighted assets.
“The committee discussed the possible drawbacks of reducing the buffer immediately,” officials said, according to the record of the gatherings held on June 28 and July 1. “The most pressing concern was that banks could use the reduction to increase dividend payments or engage in other distributions of capital, rather than to absorb additional losses without constraining the supply of credit.” When the committee announced it was reducing the buffer on July 5 it also gave a stark warning to banks that they should not use the extra funding to increase dividend payouts. The buffer — designed to be bolstered in good times and eased in downturns to support lending — had been increased, effective in March next year. Officials now see it staying at zero until at least June 2017.
The record reiterated the FPC’s readiness to take further measures if warranted.
“The FPC considered whether to take any policy action on bank liquidity buffers,” and agreed that additional long-term repo operations that the central bank had already put in place were sufficient for now, the record showed. Officials also published a redacted portion of text from their March meeting, which shows they received briefings on the BOE’s contingency planning in the lead up to the UK’s June 23 vote. That showed supervisors were “engaging with banks, insurers and central counterparties” on their plans, “including for managing funding and liquidity risks in sterling and foreign currency.”
The FPC said in its Financial Stability Report last week that it is “monitoring closely” five key risks including the current-account deficit, which stands at almost 7 percent of economic output and which needs to funded by inward investment.
The FPC’s next meeting will be on Sept 20, with the record of that gathering published on Oct 3.