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Bank of England gives banks extra checkup as virus slams economy

LONDON (Reuters) – The Bank of England will give Britain’s financial system an extra health check next month to make sure it can handle the coronavirus outbreak’s colossal impact on the world’s fifth-largest economy and its financial markets.

Britain’s economy is now declining “very sharply” and a range of financial asset prices had dropped significantly, members of the BoE’s Financial Policy Committee (FPC) said after holding a meeting on Thursday.

They concluded that the BoE needed to publish on May 7 an interim Financial Stability Report alongside its scheduled Monetary Policy Report. Such checks on banks usually take place twice a year, and the next one had not been due until July.

“Given the material developments in recent weeks, the (Financial Policy Committee) decided to supplement its normal practice with an additional interim Financial Stability Report,” the BoE said in a statement.

The BoE said the economy was likely to contract “much more sharply” than in previous stress tests of banks, although it was also expected to recover more quickly than in the multi-year recession scenarios previously included in those tests.

Gauges of business activity have already slumped to record low levels and economists expect Britain’s economy will contract by at least 10% in the second quarter.

The coronavirus outbreak had not harmed the core of Britain’s banking system as the financial crisis did a decade ago, the BoE said.

“Major UK banks have shown in repeated stress tests their ability to absorb, by using their capital buffers, very severe market shocks,” the BoE said.

Next month’s Financial Stability Report will also take into account unprecedented measures taken by the BoE and government to prop up Britain’s ailing economy.

Earlier on Thursday, the BoE said it would temporarily lend the government money if needed to help finance its massive COVID-19 spending plans, reviving a measure used during the 2008 financial crisis.

(Reporting by Andy Bruce; editing by Stephen Addison and William James)