The Bank of England’s latest Financial Stability Report which sets out the Financial Policy Committee’s (FPC) agenda has urged banks to remember the pressures consumers and businesses still face despite the rapid rollout of a Covid-19 vaccine.
The FPC also said that while businesses and individuals have emerged largely stable from the pandemic, there are areas of concern. It said that SME debt has risen by about a quarter, although much of it is in low-interest government-guaranteed loans. It also noted that while property prices are surging, the number of high-risk mortgages is still lower than before the pandemic with around one in 20 home loans above 90% loan to value compared with one in five in 2019.
The FPC said it is in banks’ ‘collective interest; to continue to lend to support customers rather than trying to conserve their own capita
While the central bank did point to signs of improvement in the country’s economic outlook, it also warned of potential risks that still remained from coronavirus. In particular, it said that households and businesses will need continued support from the UK financial system as the economy recovers and the government’s exceptional support measures unwind over the coming months. It added that economic activity could be depressed following a further pickup in coronavirus case numbers, or a possible drop in vaccine effectiveness arising from mutations of the virus.
Households and businesses will need continued support from the UK financial system as the economy recovers and the Government’s exceptional support measures unwind over the coming months.
Commenting on The Financial Stability Report, Karim Haji, EMA and UK Head of Financial Services, KPMG, said “The Bank is cautiously optimistic, relaxing rules on dividend payments whilst also giving the green light for banks to use their capital buffers to the fullest extent if that’s what it takes to keep supporting UK businesses. The decision to hold the countercyclical buffer ratio at 0% until 2021 – which with the implementation lag means the end of 2022 – will help ensure this remains a reality.”
“After more than a decade of being told to build buffers, the instruction to use them has seemed a drastic shift but in reality, few banks have needed to make a dent in their reserves. The scale of banks’ capital supports the confidence demonstrated in today’s report, with UK banks remaining resilient to more drastic hits to the economy than those forecasts. That said, it seems notable that there is no warning of potential short-term inflation in today’s report, this could be overly optimistic given the many compounding pressures that remain in light of the pandemic and Brexit.
“The evidence of increased risk-taking in financial markets is clearly a significant concern to the Bank of England, which means firms need to ensure they have robust risk controls and governance around asset valuations and credit standards. The use of third party ‘critical’ technology providers is also firmly on the watch list and whilst it’s broadly recognised that a cross-sector, cross border approach is needed, the realities of achieving that will be challenging to say the least.”
Responding to the Bank of England’s Financial Stability Report, David Postings, Chief Executive of UK Finance, said “The banking sector has remained resilient throughout the pandemic and capital and liquidity positions remain strong. As the UK’s economic outlook improves, we welcome the PRA’s decision to return to its normal approach to dividend payments. The banking and finance sector has been vital in supporting the UK economy during the pandemic, facilitating billions of pounds of support for businesses and helping millions of consumers with payment deferrals, and is committed to playing a full role to back the economic recovery.”