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Bank of England says UK banks can withstand COVID-19 and Brexit

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·Senior City Correspondent, Yahoo Finance UK
·3-min read
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Bank of England governor Andrew Bailey. Photo: Kirsty O'Connor/Pool via AP
Bank of England governor Andrew Bailey. Photo: Kirsty O'Connor/Pool via AP

Banks remain strong enough to weather the COVID-19 crisis and have done all they can to prepare for Brexit, the Bank of England said on Friday.

The central bank published its bi-annual financial stability report on Friday, detailing what it sees as the biggest threats facing the UK financial system and what it is doing to combat them.

The most obvious threat comes from the COVID-19 pandemic, which has provoked what an “economic emergency.” The UK economy is on track to shrink by 11% this year and will not recover to pre-pandemic levels until 2022, the Bank of England said last month.

READ MORE: UK banks given green light to restart dividends with 'guardrails'

In its last financial stability report in August, the Bank of England said the UK’s banking system had enough cash to cope with an expected rise in losses brought on by the pandemic. The central bank said the financial system can and should continue to lend to support Britain’s economic recovery.

The Bank of England repeated that verdict in its December report, saying banks are “strong enough to support households and businesses through this difficult period.” The central bank said UK businesses had so far borrowed £80bn this year — four times their total in 2019.

Major banks have buffers enough to absorb up to £200bn in losses, which is far more than the Bank of England currently expects given the economic outlook.

The Prudential Regulation Authority (PRA) — the branch of the central bank that regulates the UK’s financial system — said late on Thursday that lenders could restart dividends and staff bonuses. The watchdog concluded after a recent review that balance sheets were robust enough to handle payouts. The PRA blocked payouts in March due to the onset of COVID-19.

WATCH: Bank of England warns long-term effects of no-deal Brexit worse than the pandemic

Aside from COVID-19, the Bank of England also weighed the risks from Brexit. The central bank said banks had “made extensive preparations” and “most risks to UK financial stability have been mitigated”.

“Some disruption to financial services could arise which does not pose a risk to financial stability,” the report said. “Whatever the future relationship with the EU, we remain committed to high financial stability standards in the UK.”

However, the Bank of England cautioned that financial stability is “not the same as market stability” and services could be disrupted when the transition period ends, particularly for EU-based clients.

UK Prime Minister Boris Johnson told Brits to prepare for a likely no deal Brexit on Thursday night amid continued stalemate in trade talks.

Elsewhere, the Bank of England said it was also keeping an eye on “stablecoins” — currency-linked cryptoassets, such as Facebook’s Diem. The bank said stablecoins “must meet standards that ensure they are as safe as existing forms of money.”

The Bank said its Financial Policy Committee was considering the impact of widespread stableoing adoption on financial stability and will publish a paper on the topic “in due course”.

The Bank of England said the mortgage market was strong and it would review oversight of the market next year.

The publication of the financial stability report comes ahead of the Bank of England’s final monetary policy decision next Thursday. Analysts expect the central bank to leave interest rates and policy unchanged but Brexit developments could change things.

The UK and EU have both said they will reach a decision on how to resolve trade negotiations by Sunday. If talks end in failure, the Bank of England could be prompted into action to cushion the economic blow of a no deal Brexit.

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