Bank of England eases rules for banks to meet Brexit challenge

[July 05, 2016]  By David Milliken and Huw Jones

LONDON (Reuters) - The Bank of England took steps to ensure British banks can keep lending and insurers do not dump corporate bonds in the "challenging" period that is likely to follow the country's shock vote to leave the European Union.

The central bank said it would lower the amount of capital banks are required to hold in reserve, freeing up an extra 150 billion pounds for lending in a reversal of a decision it took earlier this year, when it started tightening screws on lenders because Britain's economy appeared on course for more growth.

BoE Governor Mark Carney said the move represented a "major change" that would help the economy to weather the Brexit hit.

"It means that three quarters of UK banks, accounting for 90 percent of the stock of UK lending, will immediately have greater flexibility to supply credit to UK households and firms," he told reporters.

Sterling dropped more than 10 percent against the dollar and banks' share prices fell by a fifth after Britons voted on June 23 to leave the EU, prompting Prime Minister David Cameron to say he would step down.

Sterling touched a new, 31-year low against the U.S. dollar earlier on Tuesday, hurt by Standard Life's suspension of trading in its British real estate fund but recovered some of its losses after the BoE announcement and Carney's comments.

Twenty and 30-year British government bond yields briefly touched new record lows.

With uncertainty about the future of George Osborne as finance minister, more responsibility has fallen on Carney and his fellow BoE policymakers to steer Britain through its worst political crisis in decades.

Fresh signs of weakness in the economy appeared on Tuesday.

Business confidence fell sharply in the days after the vote to leave the EU, a survey showed, and retailer John Lewis said its sales grew more slowly last week.

Furthermore, Britain's dominant services industry grew at its slowest pace in three years in June, according to a survey conducted mostly before the referendum.

The central bank said it was closely monitoring investors' willingness to fund Britain's large current account deficit after the shock outcome of the vote, as well as high levels of household debt and the subdued global economy.

Carney said the fall in sterling should help ease the balance of payments shortfall but the pace of investment would also be important.

The central bank said risks it had identified before the referendum were starting to materialize, including lower demand for commercial property.

Bank of England governor Mark Carney pauses as he speaks during a news conference at the Bank of England in London, Britain July 5, 2016. REUTERS/Dylan Martinez

BREXIT RISKS

The announcement by the BoE on bank capital, after two meetings of its Financial Policy Committee since the referendum, followed an unusually explicit comment by Carney last week that he believed the BoE would ease monetary policy soon too.

"These measures are really about Carney aligning the Bank of England's guns in case the UK economy enters a downturn," Aberdeen Asset Management Investment Manager James Athey said.

"He's not waiting for anything bad to happen but rather acting in case it does."

The BoE said risks it had identified before the vote were materializing, including lower demand for commercial property.

As part of its announcement on Tuesday, the BoE reversed a decision it took in March to increase the amount of capital banks must hold against cyclical upturns in the credit cycle.

Holding the so-called counter-cyclical capital buffer (CCB) at zero until at least June 2017 would reduce banks' capital requirements by 5.7 billion pounds, potentially freeing up an extra 150 billion pounds for lending, the BoE said.

The BoE also gave insurers more time to adjust to new EU capital rules to avoid pressuring them to dump corporate bonds and avoid high capital charges as interest rates plunge.

Before the referendum, consumer borrowing was rising at its fastest rate in a decade while mortgage lending had eased slightly as higher taxes on landlords and second-home buyers took effect in April.

The BoE said it would keep a close eye on the buy-to-let mortgage sector, in case landlords sell up as property prices fall, as well as on the rising numbers of vulnerable indebted households.

It expressed concern about a fall in investor demand for British assets - which could make it harder for the country to finance its large current account deficit - as well as trouble in commercial real estate making it harder for businesses to use their property as collateral to obtain loans.

(Writing by David Millken and William Schomberg; additional reporting by Andy Bruce, Jemima Kelly and James Davey; editing by Michael Holden and Anna Willard)

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