By Huw Jones and David Milliken
LONDON (Reuters) – The Bank of England canceled this year’s stress test of major banks on Friday and said it may be hard to implement new global capital rules on time given the focus now on supporting lending to customers hit by the coronavirus epidemic.
The decision to scrap the stress test of the country’s top eight banks followed a decision by the European Union to cancel its planned health check of leading lenders, which had also included top UK players such as Barclays and HSBC.
“The recent 2019 stress test showed that the UK banking system was resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs,” the Bank of England (BoE) said.
Last week the British central bank announced that banks could release all the capital they hold in a special “counter cyclical” buffer to support loans worth up to 190 billion pounds ($223 billion).
The BoE’s Prudential Regulation Authority (PRA), which supervises banks, said on Friday that new capital rules from the global Basel Committee due to be phased in over coming years may also have to be pushed back.
“The PRA acknowledges that the existing Basel timetable may prove to be challenging, and is coordinating internationally to ensure that implementation will happen alongside other major jurisdictions,” the BoE said.
Banks in the euro zone in particular have lobbied hard to push back the remaining package of Basel capital rules and the EU has yet to approve laws to implement it.
Stephen Jones, CEO of banking industry body UK Finance, said the measures would ease operational burdens and that the BoE had emphasized capital and liquidity buffers should be used to support the economy during the temporary coronavirus shock.
But Ashurst regulation lawyer Tim Cant said Britain may need to go further and adopt German regulator Bafin’s more flexible approach. Bafin is considering allowing German banks to cut the “Pillar 2” buffer set by regulators to supplement the core buffer.
The BoE also sought to ease pressure on lenders by delaying work on new rules. An assessment of liquidity at banks, which had been due to be completed mid 2020, has been paused until further notice, and a planned test next year of the ability of banks to cope with climate change is under review.
Banks have asked regulators for relief from a new accounting rule know as IFRS 9 that forces them to make provisions for expected losses on loans before they are actually incurred.
Due to the coronavirus epidemic, Britain is facing a sharp downturn, which typically increases the number of loans turning sour, raising the prospect of banks having to find more capital and suffering further hits to profits during an economic crisis.
“The Bank continues to consider the potential interaction of COVID-19 with IFRS 9…. and expects to provide further guidance to firms regarding our approach next week,” the BoE said.
Given the sudden onset of the virus, making reliable forward-looking judgments on possible losses from loans is “very challenging”, it added
If lenders make such judgments, they would note the “temporary nature of the shock” and fully take into account the significant measures, such as repayment holidays, that have been announced by the government to support the economy, it added.
The BoE’s Financial Policy Committee, which has powers to order regulators to make changes to financial rules, is due on Tuesday to make a statement following its latest quarterly meeting.
The BoE also said it would postpone its joint survey with the Financial Conduct Authority into open-ended funds which had been expected to report back in June and propose rule changes.
The survey was partly triggered by the suspension and later closure of a flagship fund run by then star stock-picker Neil Woodford after it was unable to meet daily redemption requests, trapping hundreds of thousands of investors.
Earlier this week, several property funds suspended themselves after saying they could no longer value their real estate assets properly due to coronavirus uncertainty.
(Reporting by David Milliken and Huw Jones; editing by Pravin Char and Mark Potter)