Deloitte comments on BoE Financial Stability Report

Commenting on the Bank of England’s (BoE’s) Financial Stability Report, published today, David Strachan, Head of Deloitte’s EMEA Centre for Regulatory Strategy said:

“The Financial Policy Committee’s (FPC’s) core message is that it remains in banks’ own interests to continue to lend to support businesses and households; banks taking defensive action may only make the central economic outlook materially worse.

“The FPC’s tone is one of reassurance. Its analysis shows that banks have plenty of headroom to absorb losses before they have used up their regulatory capital buffers, both in a scenario in line with the BoE’s expectations, or in a more severe, double dip recession. The FPC’s ‘reverse stress test’ shows that the economic downturn would need to be roughly twice as bad as the Monetary Policy Committee’s central scenario and that unemployment would need to rise to about 15%, in order to make serious inroads into banks’ existing capital buffers.

“However, in contrast to the European Central Bank, the BoE has not set out how long it will give banks to rebuild their capital and liquidity buffers, leaving the timing of this uncertain. Instead, the BoE seems more concerned about finding ways of making banks less reluctant to use the buffers because of the consequences of doing so, such as automatic restrictions on distributions. The BoE is prepared – depending on how the situation develops – to contemplate temporary changes to the capital framework to make this possible.”

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