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Bank of England eases rules for banks to face brave new world

businesspaper Updated: Jul 06, 2016, 05:49 IST

LONDON: Confirming fears that some previously-identified risks had already crystallised in the post-Brexit vote situation, the Bank of England on Tuesday said the outlook for financial stability was‘ challenging’ and announced steps to free £150 billion (close to ₹15 lakh crore) for lending.

BoE’s announcement came amid new research that suggests that business confidence had fallen sharply after the June 23 vote to leave the EU. The share of businesses that reported feeling pessimistic about the British economy doubled in the week after the Brexit vote.

The figure jumped from 25% the week before the referendum to 49%, according to YouGov and the Centre for Economics and Business Research, whose director, Scott Corfe, said the figures indicated a “significant shock reaction” among UK businesses following the vote.

There are already indications of investments being delayed or cancelled. Easing special capital requirements, BoE’s Financial Policy Committee said the £150 billion lending could help if uncertainty caused by the leave EU vote leads to a slowdown and banks to turn cautious.

BoE governor Mark Carney said in a press conference: “This is a major change. It means that three-quarters of UK banks, accounting for 90% of the stock of UK lending, will immediately — immediately—have greater flexibility to supply credit to UK households and firms”.

The bank’s six-monthly Financial Stability Report released on Tuesday said :“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.”

It added that vital foreign in flows in the commercial property market fell by 50% in the first three months of 2016. The report mentioned several indicators of the financial system suffering a shock after the Brexit vote.

“The degree of uncertainty and nature of adjustment is evident in financial market prices, which have moved sharply following the referendum. Between 23 June and 1 July, the sterling exchange rate index fell by 9% and short-term volatility of sterling against the dollar rose to its highest level in the post-Bretton Woods era”.

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the US, Canada, western Europe, Australia and Japan in the mid-20th century, with an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to gold, and the ability of the IMF to bridge temporary imbalances of payments.

ht epaper

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