Bank of England relaxes bank rules as Brexit risks 'crystallise'

Mark Carney, governor of the Bank of England, speaks at a press conference on the BOE's Financial Stability Report in London, on July 5, 2016.
Mark Carney, governor of the Bank of England, speaks at a press conference on the BOE's Financial Stability Report in London, on July 5, 2016.PHOTO: EPA

LONDON (AFP) - The Bank of England on Tuesday relaxed commercial banks' capital requirements to boost lending to businesses and households, and warned that financial stability risks "have begun to crystallise" after Brexit.

The British central bank announced it has cut its so-called capital buffer rate from 0.50 per cent to zero, where it will stay until at least June 2017.

The move will boost lending by up to £150 billion (S$267.6 billion) - and reduce banks' regulatory capital buffers by £5.7 billion, the BoE announced.

BoE governor Mark Carney pledged it would do whatever is needed to aid monetary and fiscal stability in the wake of the June 23 referendum that saw Britain vote to exit the EU.

"The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy," Mr Carney told reporters in central London.

Major risks outlined Tuesday by the BoE's Financial Policy Committee (FPC) included fragile financial markets, subdued global economic growth, high household debt, and the "stretched" commercial real estate market, and Britain's "large" current account deficit.

"There is evidence that some risks have begun to crystallise," the FPC said in an update after Britain last month voted to exit the European Union. "The current outlook for UK financial stability is challenging," it added in a bi-annual report.

The FPC update was published after Britain last month voted to leave the 28-nation EU bloc in a shock referendum result that has sparked political turmoil and sent the pound plunging.

"It will take time for the United Kingdom to establish new relationships with the European Union and the rest of the word," the BoE said. "Some market and economic volatility is to be expected as this process unfolds."

The BoE added that British commercial banks had raised more than £130 billion of capital over the last eight years following the global financial crisis.

"The FPC is supporting the real economy by ensuring that banks can use the substantial capital and liquidity buffers they have in place," Mr Carney added on Tuesday.

The report was published after Mr Carney last week indicated that the BoE could cut its key interest rate to a new record-low level under 0.50 per cent as early as this month - while it may decide also to pump out more cash stimulus as a result of Brexit.

During the referendum campaign, Mr Carney repeatedly argued that Brexit would have a negative impact on the nation's economy and spark a possible recession.

"There is the prospect of a material slowing in the economy," he added on Tuesday.

However, the BoE chief stopped short of repeating the threat of a possible recession - defined as two technical quarters of economic contraction.

Global markets had dived in the immediate aftermath of the surprise June 23 referendum vote.

In the wake of the markets chaos, the BoE vowed to pump at least £250 billion into money markets if needed to prevent a credit crunch amid heightened uncertainty.