Yahoo Finance UK banks can withstand COVID shock, says Bank of England
The UK's banking system is strong enough to withstand the shock of COVID-19 and should continue to lend, the Bank of England has said.
"Our tests have shown that UK banks are strong enough to keep supporting households and businesses as they continue to deal with the impact of Covid," the Bank of England said on Friday. "Banks have high levels of capital. This would allow them to absorb very big losses while continuing to lend."
The verdict came as the central bank's Financial Policy Committee published the conclusions of its latest meeting. The committee looks at the risks facing the financial system and how to approach the key sector.
The committee said it was "in banks’ collective interest" to continue lending to viable businesses even a government-backed loan schemes begin to be scaled back. The Bank of England said it did not expect to raise counter cyclical buffer rates until 2022, meaning banks would have access to more capital to lend.
Elsewhere, the Bank of England said it was working with international counterparts on reforms aimed at strengthening global capital markets following shocks last year.
"At the start of the Covid pandemic, central banks had to act to stabilise important markets which were not functioning normally," the Financial Policy Committee said. "There is a risk this could happen again."
The so-called "dash for cash" last year led to a sell-off of stocks, the pound and bonds last year that forced the bank to intervene. Governor Andrew Bailey called conditions "disorderly" at the time.
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The Financial Policy Committee said it continued to review rules around open-ended funds as part of its work to strengthen market stability. Open-ended funds offer daily redemptions but often invest in harder to shift items such as property or private stock, creating a potential liquidity mismatch. These funds have faced greater scrutiny in recent years after the collapse of Woodford Investment Management and after several property funds were forced to block withdrawals due to Brexit and COVID.
The Bank of England said it "remain[s] committed to working with EU authorities towards a safe and open financial system" post-Brexit.
The central bank has established a new working group to look at possible new structures of financing to support the COVID-19 recovery and other long-term changes such as the move to net zero.
"As the economy recovers, the financial system will play an important role in supporting sustainable economic growth," the Financial Policy Committee said.
