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BoE Expected to Loosen ‘Rainy Day Fund’ Requirement for Banks

BoE Expected to Loosen ‘Rainy Day Fund’ Requirement for Banks

The Bank of England (BoE) may loosen its new requirement for banks to build up a ‘buffer’ in order to help banks cope with the post-Brexit uncertainty, according to senior bankers. The buffer required banks to build up a rainy-day fund by putting away extra capital to draw upon in times of economic downturn. Loosening or halting altogether the buffer requirement would have no immediate impact on banks’ balance sheets, as the Bank only announced the buffer in late 2015 and told banks in March to start building up extra capital from 2017.

Senior financiers took this as a sign that the Bank was “put[ting] out hints” while refraining from expressing their economic concerns. One banker said that the bank was finding “subtle ways to communicate to the market what it thinks is going to happen”. During an informal meeting with bank executives on Thursday, the Bank reiterated that banks across the system should continue lending in order to prevent a financial crisis from developing. It also announced this week that it will offer special liquidity auctions over the summer.

One of the Bank’s Financial Policy Committee’s main ‘macro-prudential’ tools is the ability to vary the ‘countercyclical buffer’ across the economic cycle. This allows banks to reduce the buffer in times of economic stress in order to avoid choking off lending. Huw Pill, chief European economist at Goldman Sachs, expects the Bank to expand its Funding for Lending Scheme, which lets commercial banks borrow cheaply from the Bank to fund loans to companies. Mark Carney, the governor of the BoE, warned politicians on Thursday that interest rates were likely to be cut in response to a possible downturn.

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