Lloyds and RBS owner NatWest among big banks able to deal with major economic shock, says BoE

Britain’s big banks which include Lloyds and Royal Bank of Scotland owner NatWest can deal with a shock far worse than the economic fallout caused by the pandemic and still continue to lend, Bank of England officials believe.

Pedestrians walk past the main entrance of The Bank of England in the City of London. Britain’s big banks can deal with a shock far worse than the economic fallout caused by the pandemic and still continue to lend, the Bank of England believes. Picture: Daniel Leal-Olivas/AFP/Getty Images
Pedestrians walk past the main entrance of The Bank of England in the City of London. Britain’s big banks can deal with a shock far worse than the economic fallout caused by the pandemic and still continue to lend, the Bank of England believes. Picture: Daniel Leal-Olivas/AFP/Getty Images

The country’s lenders have sufficiently strong so-called capital buffers to get them through the crisis, after building them up since the 2008 financial crisis.

The central bank’s financial policy committee also said that it would allow lenders to reduce their “countercyclical capital buffer” – a type of rainy day fund – to zero per cent for at least another year.

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This should give lenders confidence that they can reduce the buffer without then being required to jack it up when officials say so.

Meanwhile, analysts pointed to a series of positive developments that could lift investor confidence, including the possibility of banks restoring dividend payouts in the year ahead.

Richard Hunter, head of markets at Interactive Investor, said: “There have been several optimistic indicators of late, such as the announcement of a Covid-19 vaccine and the possibility of further stimulus in the US, and the potential restoration of dividend payments by UK banks is another signpost towards the return to some kind of normality in 2021.

“News that the dividend shackles will be lifted from the banks is an early new year boon for income-seeking investors.

“It was clear from the recent third-quarter reporting season that the banks were adequately capitalised and capable of returning to dividend payments. Indeed, most of the banks expressed a desire to be allowed to announce dividends at their full-year results in the new year, and subject to certain limitations set by the Prudential Regulation Authority, will now be able to do so.

“It remains to be seen whether the banks will return to such payments with all guns blazing.”

The financial policy committee also said that most risks of a potential no-deal Brexit to the UK’s financial stability have been mitigated. The financial system has had time to prepare for potential Brexit outcomes.

It noted: “Financial stability is not the same as market stability or the avoidance of any disruption to users of financial services.

“Some market volatility and disruption to financial services, particularly to EU-based clients, could arise.”

The committee added: “Reflecting the extensive preparations by UK authorities and the financial sector, the FPC… continues to judge that most risks to UK financial stability that could arise from disruption to the provision of cross-border financial services at the end of the transition period have been mitigated.”

The December report would normally include an annual stress test. However in March the Bank of England decided to cancel the test for the first time since it was launched in 2014. Resources were needed to support businesses through the pandemic.

Last year the central bank found that all of the top lenders in Britain would be able to weather the worst-case scenario, which simulated a no-deal Brexit or a financial crisis which cut deeper than the 2008 crash. Now, a year later, it looks like both these scenarios could be realised.

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