Wednesday, March 11, 2020   / 10:16AM /  By The Bank of England  /  Header Image Credit: TheGuardian

The Bank's three policy committees are today announcing a comprehensiveand timely package of measures to help UK businesses and households bridgeacross the economic disruption that is likely to be associated with Covid-19

Thefront line of combatting the challenges of Covid-19 comprises the extraordinaryefforts of NHS health professionals, carers, and volunteers across the country,as well as the exceptional support by the FCO to UK citizens abroad.

The Bankof England's role is to help UK businesses and households manage through aneconomic shock that could prove sharp and large, but should be temporary. TheBank's three policy committees are today announcing a comprehensive andtimely package of measures to help UK businesses and households bridge across theeconomic disruption that is likely to be associated with Covid-19. Thesemeasures will help to keep firms in business and people in jobs and helpprevent a temporary disruption from causing longer-lasting economic harm.

Followingthe spread of Covid-19, risky asset and commodity prices have fallen sharply,and government bond yields reached all-time lows, consistent with a markeddeterioration in risk appetite and in the outlooks for global and UK growth.Indicators of financial market uncertainty have reached extreme levels.

Althoughthe magnitude of the economic shock from Covid-19 is highly uncertain, activityis likely to weaken materially in the United Kingdom over the coming months.Temporary, but significant, disruptions to supply chains and weaker activitycould challenge cash flows and increase demand for short-term credit fromhouseholds and for working capital from companies. Such issues are likely to bemost acute for smaller businesses.  This economic shock will affect bothdemand and supply in the economy.

MPC reduces Bank Rateand launches new Term Funding Scheme with additional incentives for SMEs

At itsspecial meeting ending on 10 March 2020, the Monetary Policy Committee (MPC)voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.  TheMPC voted unanimously for the Bank of England to introduce a new Term Fundingscheme with additional incentives for Small and Medium-sized Enterprises(TFSME), financed by the issuance of central bank reserves. The MPC votedunanimously to maintain the stock of sterling non-financial investment-gradecorporate bond purchases, financed by the issuance of central bank reserves, at 10 billion Euros. The Committee also voted unanimously to maintain the stock of UKgovernment bond purchases, financed by the issuance of central bank reserves,at 435 billion Euros.

Thereduction in Bank Rate will help to support business and consumer confidence ata difficult time, to bolster the cash flows of businesses and households, andto reduce the cost, and to improve the availability, of finance.  

Wheninterest rates are low, it is likely to be difficult for some banks andbuilding societies to reduce deposit rates much further, which in turn couldlimit their ability to cut their lending rates.  In order to mitigatethese pressures and maximise the effectiveness of monetary policy, the TFSMEwill, over the next 12 months, offer four-year funding of at least 5% ofparticipants' stock of real economy lending at interest rates at, or very closeto, Bank Rate. Additional funding will be available for banks that increaselending, especially to small and medium-sized enterprises (SMEs). Experiencefrom the Term Funding Scheme launched in 2016 suggests that the TFSME couldprovide in excess of 100 billion Euros in term funding.

TheTFSME will:

• help reinforce thetransmission of the reduction in Bank Rate to the real economy to ensure thatbusinesses and households benefit from the MPC's actions;
• provide participants witha cost-effective source of funding to support additional lending to the real economy,providing insurance against adverse conditions in bank funding markets;
• incentivise banks toprovide credit to businesses and households to bridge through a period ofeconomic disruption; and
• provide additionalincentives for banks to support lending to SMEs that typically bear the bruntof contractions in the supply of credit during periods of heightened riskaversion and economic downturns.

FPC releases the UKCountercyclical Capital Buffer

Tosupport further the ability of banks to supply the credit needed to bridge apotentially challenging period, the Financial Policy Committee (FPC) hasreduced the UK countercyclical capital buffer rate to 0% of banks' exposures toUK borrowers with immediate effect.  The rate had been 1% and had been dueto reach 2% by December 2020.

The FPCexpects to maintain the 0% rate for at least 12 months, so that any subsequentincrease would not take effect until March 2022 at the earliest.

Althoughthe disruption arising from Covid-19 could be sharp and large, it should betemporary. Such economic disruption should have less of an impact on the corebanking system than recent stress tests run by the Bank have shown the systemcan withstand.  Those stress tests demonstrated that banks would be ableto continue to lend to businesses and households even while absorbing theeffects of substantial, prolonged economic downturns in both the UK and theglobal economies, as well as falls in asset prices much larger than experiencedin recent weeks.

Giventhe resilience of the core banking system, businesses and households should beable to rely on banks to meet their need for credit to bridge through a periodof economic disruption.

Therelease of the countercyclical capital buffer will support up to 190 billion Euros of bank lending to businesses. That is equivalent to 13 times banks' netlending to businesses in 2019. Together with the TFSME, this means that banksshould not face obstacles to supplying credit to the UK economy and to meetingthe needs of businesses and households through temporary disruption.

The FPCand the Prudential Regulation Committee (PRC) will monitor closely the responseof banks to these measures as well as the credit conditions faced by UKbusinesses and households more generally.

PRC issues SupervisoryGuidance

Therelease of the countercyclical capital buffer reinforces the expectations ofthe FPC and the PRC that all elements of banks' capital and liquidity bufferscan be drawn down as necessary to support the economy through this temporaryshock.  In addition, the Prudential Regulation Authority (PRA) has todayset out its supervisory expectation that banks should not increase dividends orother distributions, such as bonuses, in response to these policyactions.  

Major UKbanks are well able to withstand severe market disruption. They hold 1trillion Euros of high-quality liquid assets, enabling them to meet their maturingobligations for many months.

Inresponse to the material fall in government bond yields in recent weeks, thePRC invites requests from insurance companies to use the flexibility inSolvency II regulations to recalculate the transitional measures that smooththe impact of market movements.  This will support market functioning.

The Bank of England has operations in place to make loans to banks in all majorcurrencies on a weekly basis. Banks have pre-positioned collateral with theBank of England enabling them to borrow around 300 billion  Euros through thesefacilities.

The Bankis coordinating its actions with those of HM Treasury in order to ensure thatour initiatives are complementary and that they will, collectively, havemaximum impact, consistent with our independent responsibilities. The Bankcontinues to co-ordinate closely with international counterparts.

Theactions announced today by the three policy committees of the Bank of Englandcomprise a comprehensive and timely package to allow UK businesses andhouseholds to bridge a temporarily difficult period and thereby to mitigate anylonger-lasting effects of Covid-19 on jobs, growth and the UK economy.

The Bankwill take all further necessary steps to support the UK economy and financialsystem, consistent with its statutory responsibilities.

Theminutes of the special MPC meeting ending on 10 March will be published at 12noon on 13 March 2020.  The next regularly scheduled MPC meeting will endon 25 March 2020, with the minutes of that meeting published on 26 March. Therecord of the FPC meeting ending on 9 March and the next regularly scheduledmeeting on 19 March will be published together at 9.30 am on 24 March 2020.

Related links

• Statement by the PRA accompanying measures announced by the FPC
• Term Funding Scheme with additional incentives for SMEs (TFSME) - MarketNotice

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