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BoE Increases Capital Buffer Ceiling To Facilitate Probable Post Brexit Lending Market

Mar 30, 2016 08:05 AM EDT

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The Financial Policy Committee (FPC) of Bank of England (BoE) has warned on Tuesday that the most significant domestic risks to financial stability are connected to the referendum on Brexit. The FPC cautions appear following deterioration in financial outlook of the UK since November last and indication for a period of heightened and prolonged uncertainty.

The uncertainty may eventually affect the cost and availability of financing for a wider range of UK borrowers. FPC has also cautioned that these pressures may reinforce existing vulnerabilities, reports BBC.

FPC's cautionary statements single out Brexit referendum as the biggest threat against domestic stability. BoE also forecasts that the pound will tumble and eventually UK will have to struggle to mitigate the current account deficits.

Campaigners against Brexit also urge the public to consider the warnings seriously. On the contrary, UK economy will have better prospect outside EU, argues supporters of Brexit, according to a report published in The Guardian.

To withstand the possible economic pressure centering Brexit, BoE has also announced on Tuesday increasing the capital buffer requirement of the banks. The buffer capital is expected to help in lending and other essential banking services in times of financial stress. According to the new regulation, banks in Britain will have to deposit 0.5% of their risk weighted assets by March 29, 2017, reports The New York Times.

BoE also forecasts for gradual increase of countercyclical capital buffer rate to 1% of its risk weighted assets. The existing rate is zero and the British central bank intends to review the rate time to time considering the risk the banking system may have to face as consequence of Brexit in the future.

However, the Prudential Regulation Authority, a regulator within BoE has reduced a separate capital buffer requirement overlapping with the countercyclical capital buffer. The new regulation will allow banks with investments more than 75% of their risk weighted assets in the UK market will be exempted from increasing the capital buffer.

Meanwhile, John Redwood, an MP from the Conservative Party supporting Brexit, has raised dispute against the FPC assessment while addressing to the World at One on BBC Radio. He has accused the central bank for reducing interest rates despite a surge in inward investment while getting nearer to the referendum poll. He however, criticizes the Brexit naysayers citing the German bid to acquire stake in LSE despite possibility for leaving the EU.

Britain's banking sector may face liquidity crisis as consequence of Brexit. Citing the possible outlook of British economy, BoE has increased capital buffer requirement of the banks against their risk weighted assets. The deposited fund is expected to help the banking sector in maintaining steady supply of liquidity in the lending market.

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