UK banks await turn of credit screw by Bank of England

LONDON: Britain’s banks are likely to be told by the Bank of England (BoE) on Tuesday to put aside more money in case the country’s economic recovery runs out of steam in future, as the central bank subtly shifts its policy stance.

But any tightening of the screws is likely to be modest.

The BoE has said the time is coming for banks to beef up their capital buffers against future losses as they lend more freely after the financial crisis, a move which could represent a back-door way of dampening the availability of credit.

The BoE, given wide powers over banks after the 2007-2009 financial crisis exposed the damage they can inflict on the economy, is due to release its half-yearly Financial Stability Report at 0200 ET on Tuesday.

Banking analysts at Nomura said they expected the BoE to increase for the first time the so-called counter-cyclical capital buffer (CCB) for banks, a tool meant to fine-tune risk-taking by lenders over the course of a credit cycle.

“Markets may view it as a substitute for conventional monetary tightening,” Nomura said in a note to clients.

Currently set at zero, the CCB was introduced globally after the financial crisis forced taxpayers to rescue undercapitalized lenders. Nomura said it could be increased by the BoE for British lenders to 0.5 percent.

A side-effect would be to dampen credit. BoE deputy governor Jon Cunliffe said last month lending had entered a more normal phase and it might be best to start raising the CCB “sooner rather than later”.

Yet few expect a sharp increase. Several BoE policymakers have been at pains in recent weeks to say the amount of capital banks already hold is in the right ballpark.

The buffer is part of so-called macroprudential policymaking that looks at risks missed by regulators in the run-up to the financial crisis, and it remains largely untested.

“We had macroprudential policies in the 1970s with prices and incomes policies in Britain. They failed miserably and there is nothing solid on which to base this stuff,” said Simon Gleeson, a financial services lawyer at Clifford Chance.

The BoE has said that setting the CCB is not about trying to second-guess where the economy is heading, and is rather about moving bank capital in line with actual risks.

Analysts at Berenberg said the BoE may seek to stem the flow of lending to the buy-to-let and commercial property sectors, following finance minister George Osborne’s decision to increase transaction taxes on buy-to-let properties last week as he sought to rebalance the housing market in favor of homebuyers.

Also on Tuesday, the BoE will announce the results of its stress tests of how Britain’s biggest banks would fare if the slowdown in emerging markets turns into a full-blown crisis, and a report into dwindling bond market liquidity, linked to big swings in normally staid debt markets.

Banks have blamed lower liquidity on tougher rules that make it more expensive for them to offer deep markets to investors at all times.

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