BoE allows banks to tap capital cushion during coronavirus

LONDON (Reuters) – The Bank of England told banks on Wednesday they can tap one of their capital buffers to maintain lending during the coronavirus epidemic, but warned they must not use the cash for bumping up bonuses or dividends.

Insurers were also offered relief on the long-term phase-in of new capital rules.

The BoE’s Financial Policy Committee said that for banks it was cutting the so-called counter cyclical capital buffer (CCYB) to 0%, reversing a decision last year to raise it from 1% to 2% by the end of 2020.

The release of the buffer will support up to 190 billion pounds of bank lending to businesses, equivalent to 13 times banks’ net lending to businesses in 2019, the BoE said.

“The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest,” the BoE said in a statement.

“Although the disruption arising from Covid-19 could be sharp and large, it should be temporary.”

The BoE’s Prudential Regulation Authority, which supervises banks, said it expects lenders not to increase dividends or bonuses in response to releasing the CCYB.

“Such restrictions are consistent with the overarching aim of these buffers, which is to enable banks to continue to support the real economy and avoid amplifying a system-wide crisis,” the PRA said.

Any decision taken by banks regarding bonuses must be “consistent with the maintenance of a sound capital base”, it added.

Last year’s stress test of leading banks in Britain showed that lenders could still provide loans to businesses even during a prolonged economic downturn “as well as falls in asset prices much larger than experienced in recent weeks”, the BoE said.

“Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption,” the BoE said.

Banks already hold a trillion pounds of liquid assets that enable them to meet their obligations for months, it added.

The PRA said it would also be willing to accept applications from insurers to recalculate the relief they were getting as part of a long-term phase in of their capital rules.

“In any application, the PRA expects firms to be able to demonstrate that a material change in risk profile has occurred,” the PRA said.