UK Edition
Post-Brexit bank boost ‘more powerful than QE’ says Carney
Banks have been given a major boost from looser rules on capital requirements, Mark Carney said, claiming the post-Brexit policy tweak has “more immediate power” than the Bank of England’s £375bn money-printing programme.
In the wake of the referendum vote to leave the EU, the Bank of England told banks they can use their £5.7bn counter-cyclical capital buffers to boost lending, freeing up as much as £150bn of lending capacity.
The aim is to prove to markets that any household or firm which is creditworthy and wants to borrow will be able to get a loan, as the banks are open for business.
“The comparison with quantitative easing (QE)… you can think of this as being much further down the transmission mechanism, it is right on the balance sheet of banks and so much closer to the real economy, so in that regard it potentially has more immediate power,” Mr Carney told MPs on the Treasury select committee.
QE was the programme from 2009 to 2012 under which the Bank of England printed money to buy £375bn of government bonds in an effort to reduce market interest rates at a time when the Bank’s base rate was already at the historic low of 0.5pc.
The plan did not, however, directly boost demand for loans, meaning banks could have a large amount of cash ready to go but struggle to find customers to take the credit.
“[Banks] are private institutions, their expertise is risk and the amount of risk they are willing to take and how they price that credit will be a function of their view of the general economic environment,” said Mr Carney.
However, “we have been talking to the banks… and their orientation is outward facing, their balance sheets are in strong positions, they are in the business of taking on risk,” the governor said.
“If they have to, they may adjust their risk profit, but they have a lot of capital and they need to put it to work.”
That indicates Mr Carney expects banks to seek lending opportunities enthusiastically and compete hard for business, although if the economy slows down, the banks may not want to lend as much to the riskiest customers.
“The consequence of giving [the banks] more capital headroom is to give them more flexibility. It should make them less risk averse and ensure that credit supply is not what is constraining the economy,” said Mr Carney.
However, he said he did not expect the £150bn of extra lending to appear immediately. Banks already had room to lend more money before the change in capital rules and, even in years of strong economic expansion, credit growth may only have been in the tens of billions of pounds.
As a result “it will take some time for that [£150bn] capacity to be used up”, the governor predicted.