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The Bank of England is forcing UK banks to hold an extra £6bn in capital to guard against macroeconomic risks unrelated to Brexit.
The BoE said on Tuesday it would raise a special “counter-cyclical” buffer by half a percentage point, to 1 per cent, or about £11.4bn in aggregate. The buffer is intended to force lenders to put aside more capital during good times to draw down upon in bad.
The aim is to enable lenders to better withstand “material” macroeconomic risks unrelated to Brexit, such as global debt levels, asset valuations and misconduct costs.
The buffer could rise again next year, warned the BoE.
Results of the BoE’s annual stress tests on Britain’s biggest banks, published on Tuesday, showed they have enough capital to lend in the event of a “disorderly” Brexit.
“In our judgment, banks are now resilient to the risks of a disorderly Brexit,” Mark Carney, governor of the BoE, said on Tuesday. But he added: “The question is, what if something else were to happen at the same time?”
Mr Carney nevertheless also warned that a “hard Brexit” would have an “an effect on households and businesses”.
“There will be some pain associated with that,” Mr Carney said. “This is about minimising that, dampening that.”
The central bank is especially worried about the 6m British and 30m European policyholders who may find their insurance contracts void if the UK leaves the EU without a Brexit deal. Legal uncertainty also hangs over £26tn of outstanding derivatives contracts.
On Tuesday the BoE repeated calls for lawmakers on both sides of the Brexit negotiations to agree a “transitional arrangement” to provide certainty for businesses. Regulators have previously said an agreement needs to be in place by Christmas so financial services firms do not start moving operations.
The BoE also said that UK lawmakers need to put in place a legal and regulatory framework so that legislation dealing with financial regulation can be passed after the EU withdrawal bill.
The BoE’s Prudential Regulation Authority is expected to detail this year how it will deal with the wave of authorisations that wholesale banks headquartered in the EU will need to apply for post-Brexit. The regulator has already said that it expects EU banks with a strong retail presence in Britain to establish subsidiaries in the UK.
Royal Bank of Scotland and Barclays emerged as the weakest lenders during the stress tests but no bank has to raise more capital as a result; a first since the BoE started stress tests in 2014.