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Law360, London (December 11, 2020, 6:32 PM GMT) -- The Bank of England said Friday that it will scrap a capital buffer for banks until at least the end of 2021 to encourage firms to lend to households and businesses, as Britain continues to deal with the economic fallout caused by the coronavirus crisis.
The central bank's Financial Policy Committee, or FPC, said it will keep the so-called countercyclical capital buffer rate at 0% until at least the end of 2021, removing a capital requirement to protect lenders and encourage them to pump money into the wider economy.
The countercyclical buffer is one of several capital buffers banks are required to hold to protect against market stress under the Basel III regulatory framework for bank capital. The rules are among measures taken since the 2008 financial crisis to allow banks to absorb losses without collapsing.
The central bank dropped the rate to 0% from 1% in March to shield the economy against downturns as the coronavirus began spreading in Britain.
The committee, which aims to ensure that the U.K. financial system is resilient to risks, said Friday that it does not expect the rate to rise until the end of 2022 because of a "usual 12-month implementation lag." And the buffer rate will not return to the standard 2% until banks are able to raise capital while continuing to lend to the economy.
"Although there have been encouraging developments on vaccines, the FPC, consistent with its remit, is focused on the range of downside risks that remain," the committee said Friday. "These include risks that could arise from the evolution of the pandemic and consequent measures to protect public health, as well as from the transition to new trading arrangements between the EU and the U.K."
But the FPC said that the U.K. banking system has remained resilient during the COVID-19 pandemic and has the capacity to continue supporting businesses and households because of the substantial buffers that they have stocked up since the 2008 crisis.
This is despite the country anticipating a rise in unemployment and business insolvencies, the BoE committee said.
The Bank of England said in a separate release Friday that businesses have borrowed £80 billion ($105 billion) so far from lenders, compared to £20 billion by the same date in 2019.
The government has encouraged business lending by guaranteeing loans during the coronavirus crisis. But the National Audit Office has warned that companies defaulting on their repayments could cost the U.K. up to £26 billion.
--Editing by Alyssa Miller.
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