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Law360, London (August 6, 2020, 3:12 PM BST) -- Britain's financial institutions hold adequate amounts of capital and should be able to continue to lend money to consumers during the COVID-19 pandemic, the Bank of England said Thursday, as the crisis continues to disrupt the economy.
New data from the central bank's financial policy committee for this month shows that the expected loss from loans to businesses and households is set to be lower than the BoE had forecast three months ago. The committee, known as the FPC, keeps watch on the financial system and acts to remove threats to its resilience.
The country's top five banks have warned in recent days that they expect to lose billions of pounds from loan defaults. HSBC says it could lose up to $13 billion, and NatWest expects its provision for bad debts could rise up to £4.5 billion ($6 billion).
The committee said — as the BoE stressed in its August monetary policy report — that although economic output is expected to have fallen substantially the "cumulative loss of output resulting from the pandemic is projected to be somewhat smaller" than that outlined in the May report. The MPR sets out the economic analysis that the central bank uses to make interest rate decisions.
"Banks have the capacity, and it is in the collective interest of the banking system, to continue to support businesses and households through this period," the FPC said.
The committee conducted a "reverse stress test" to establish how harsh the environment would have to be to deplete regulatory capital reserves as much as they were drained in the 2019 stress tests that informed how those buffers were set.
"In that exercise, bank's capital ratios were depleted by over five percentage points," the FPC said. Because lenders' capital buffers in the real world are larger than this, such a depletion of capital would, on average, "use up only around 60% of the buffers which sit above their minimum requirements."
The committee concluded that, based on the exercise, banks are "resilient to a very wide range of possible outcomes."
Banks have provided businesses with loans worth billions of pounds through government-backed schemes to help them survive the pandemic, and households have also been given assistance such as mortgage "payment holidays."
--Editing by Ed Harris.
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