LONDON (Reuters) – Banks should not be uneasy about dipping into their capital buffers to keep lending to the coronavirus-hit economy, Bank of England Governor Andrew Bailey said on Thursday.
The key message to the banking sector is that capital buffers are there to be used at a time like the present, Bailey told an online event.
“I understand there is a natural unease to do that. Given the history of this, given the financial crisis, it’s a brave person who says ‘yes, I am going to run my capital ratio down’,” Bailey said.
“We have to use the stress test to demonstrate that is a realistic and sensible policy,” Bailey told a conference organised by the Single Resolution Board, which deals with failed euro zone lenders.
Banks face sharply rising provisions as businesses and households fail to make repayments on loans. Regulators have repeatedly said they will give lenders sufficient time to replenish their buffers once the crisis is over.
Bailey said the current crisis had been the “first really big test” of reforms such as increased capital requirements introduced after the global financial crisis a decade ago.
There is a lot of evidence that those reforms have achieved what they set out to do, he said.
But the crisis has also showed the need for more “nimble tools” such as faster, more focused stress tests of bank capital buffers the BoE undertook over the summer, Bailey said.
Sean Berrigan, head of the European Commission’s financial services unit, said banks were in a much better position to weather the COVID-19 crisis than they were in the financial crisis.
“We don’t expect a 2008 experience, but we cannot rule that there will be problems with individual banks … We are reassured that we are not going to face a wave of insolvencies,” Berrigan said.