The Bank of England has reacted quickly to the downturn in the financial markets, by announcing a raft of measures which are designed to support businesses and banks through these uncertain times. As part of our ongoing series on the impact of the COVID-19 outbreak on the banking and finance sector, in this post we examine each of the key measures below.
Interest Rates Reduced
The Bank of England base rate has been lowered by 50 basis points to 0.25%. This is designed to ease the pressure on businesses whose cash-flow has been negatively affected by the outbreak. This, coupled with measures already put in place by some of the big banks, should provide some short-term relief for affected businesses with loan obligations.
Capital Adequacy Levels Relaxed
The Financial Policy Committee has relaxed the capital adequacy requirements on banks in order to release further funds to support businesses. Known as the ‘Countercyclical Capital Buffer’ this is the amount which banks are required to keep in reserve to protect against the banks’ exposure to borrowers during an economic downturn. It is estimated that this will release up to £190bn of lending power to the banks, which is roughly equivalent to 13 times banks’ net lending to businesses in 2019. This is designed to be a temporary solution to assist with bridging businesses through the current disruption.
Funding Scheme Announced
A new funding scheme for small and medium sized enterprises has also been introduced by the Bank of England. This correlates with the interest rate reductions to allow banks to provide lower-cost funding to businesses, without severely affecting the bank’s profitability during this period. The increased availability of lower-cost funding from the central bank will equip qualifying lenders with additional cash to provide lending support to UK businesses.
While the real impact of these measures will not be immediately assessible, they certainly represent a comprehensive package. The Bank of England, and the finance markets more generally, cannot prevent the spread of the virus, but what they can do is help to bolster the economy and businesses – these measures therefore represent the central bank’s best attempt at the current time at ensuring the market gets back on track in as short a timeframe as possible.