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On 11 March the Bank of England's three policy committees announced a package of measures aimed at combatting economic disruption from COVID-19 to UK businesses and consumers:

  • Monetary Policy Committee (MPC)  - base rate cut to 0.25% and launch of new Term Funding Scheme for Small and Medium-sized Enterprises (FSME)
  • Financial Policy Committee (FPC)  - UK countercyclical buffer reduced to 0%
  • Prudential Regulation Committee (PRC)  - issue of supervisory guidance on distributions

The outgoing and incoming Governors, Mark Carney and Andrew Bailey, stressed that, although disruption may be significant, the economic shock of COVID-19 is expected to be temporary. 

They reiterated the message from the 2019 stress tests that UK banks are well positioned to absorb the effects of “substantial, prolonged economic downturns in both the domestic and global economies”, noting that the financial system is in a very different place to 2008. 

However the committees agreed that, to support the economy and businesses to the fullest extent possible, early and decisive action was required. 

1) Reduction in base rate and launch of TFSME

The MPC voted unanimously to:

  •  Reduce the Bank Rate by 50 basis points from 0.75% to 0.25% to support business and consumer confidence.
  • Introduce a new Term Funding Scheme for Small and Medium-sized Enterprises (TSFME) to support transmission of the rate reduction to the real economy, provide additional lending and help bridge credit supply issues.
  • Maintain the stock of sterling non-financial investment-grade corporate bond purchases at £10 billion.
  • Maintain the stock of UK government bond purchases at £435 billion.

2) Release of countercyclical buffer (CCyB)

  • The FPC has reduced the CCyB rate to 0% of banks' exposures to UK borrowers, with immediate effect. The CCyB rate was previously 1% and, as announced in December 2019, was due to be increased to 2% in December 2020. 
  • The release of the CCyB is intended to further support bank lending to businesses and reduce credit disruption.
  • The FPC expects the 0% rate to remain in place for at least 12 months, meaning that subsequent increases would now not take effect until March 2022 at the earliest. 
  • The PRA will continue to consult on proposed adjustments to Pillar 2A capital requirements and macroprudential buffers until 30 April 2020 and the PRA intends to implement policy as planned on 6 July 2020.

3) PRC issues supervisory guidance

  • The PRA expects that banks will not increase dividends or other distributions, such as bonuses, in response to the measures described above. 
  • The FPC and PRC will monitor closely banks' use of the new flexibility in this period. 

Implications for firms

  • Firms who have started to plan for the increase to the CCyB will need to review their actions.
  • Firms should take note of the restrictions relating to dividend and bonus distributions.
  • Responses to the consultation on Pillar 2A capital requirements should still be submitted by 30 April 2020.
  • Stress-testing: in light of the rapidly evolving COVID-19 situation, there is a possibility of delays to bank stress-testing exercises at European and UK level. Firms should continue to monitor developments. 

Co-Head, EMA FS Regulatory Insight Centre

KPMG in the UK

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