BoE Predicts 'Great Deal Of Pain' For Financial Sector

By Lucia Osborne-Crowley
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Law360, London (June 10, 2020, 2:31 PM BST) -- Britain should expect "very significant losses" on credit to businesses and households and a "great deal of pain" for the financial sector as the financial fall-out from the COVID-19 crisis deepens, a senior central banker has warned.

Jon Cunliffe, deputy governor of financial stability at the Bank of England, said Tuesday that the coronavirus crisis has left the banking system in a state of shock and that the economic damage will continue to unfold. The crisis is "far from over," he cautioned.

"The COVID-19 natural disaster has been the toughest test of the financial system since the global financial crisis 10 years ago," Cunliffe said in a speech delivered online at an Investment Association event.

"As the implications of the spread of the virus and the policy measures to contain it became apparent, over a few short weeks, we saw an abrupt and savage pricing-down of economic prospects and economic assets across the globe."

A stress test carried out by the Bank of England's financial policy committee indicates that banks could face up to £80 billion ($102 billion) of credit losses over the next two years, Cunliffe said.

The central banker warned that the full effects of the economic meltdown have not yet been felt, and that the pandemic will continue to damage the national financial system. The country can expect continued significant losses to credit for individuals and businesses.

"Future news about the health crisis and consequent policy measures, or about geo-political tension, could well spark another very sharp repricing of economic prospects and financial assets," Cunliffe added.

Cunliffe said it is important that the banking sector learns from the way it has weathered the financial storm of COVID-19.

Financial reforms introduced after the last crisis, aimed at boosting capital reserves across the system, have been effective in protecting banks from the worst impacts of the crisis, he said.

"The major U.K. banks went into the COVID crisis holding around £1 trillion in high-quality liquid assets, over four times what they had going into the global financial crisis," Cunliffe said. The significant hit that banks took as a result of COVID-19 did not exhaust the system's capital buffers and there remains "considerable resilience" in the financial system.

The U.K. banking system has "so far been able to absorb the initial surge in demand for credit from firms and extend payment holidays to households," he said.

British regulators and central banks have hurried to help out banks and lenders as the economic impact of the lockdown hit. The Bank of England's monetary policy committee announced a rate drop for bank refinancing at 0.1% — the lowest-ever level — in March to encourage lending.

The central bank also announced that British banks have until June 2022 to publicly disclose their plans for winding down without a handout from the taxpayer if they go bust.

And the Financial Conduct Authority announced new rules to force banks to plan ahead and consider the impact on liquidity if they dip into their reserves help them continue their activities during the crisis.

--Additional reporting by Najiyya Budaly. Editing by Ed Harris.

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