Bank Of England Announces “Big, Big Package”

On Wednesday morning the Bank of England announced a large support package to help the UK economy “bridge a temporary difficult period”:

1. Base rates were cut from 0.75% to 0.25%
2. A new Term Funding Scheme for small and medium-sized enterprises (TFSME) was announced, where banks can borrow for up to four years at the bank rate provided they target the lending towards smaller businesses.
3. The Counter Cyclical Capital Buffer for commercial banks was reduced to zero.

Quantitative easing (QE) and asset purchases were kept on hold, but as BoE governor Mark Carney said, while this is already a “big, big package” he recognises such additional stimulus could still play an important part going forward.

Both incoming governor Andrew Bailey and Carney made several comments that we feel are worth mentioning.

Firstly, that the central bank is coordinating its actions with the UK Treasury, so that the measures in aggregate have the maximum impact to support the economy and to try to make sure economic deterioration is temporary.

Secondly, Carney mentioned that in 2008 the banks were a core part of creating the problems that followed, but this time around they could become a core part of the solution, by continuing to lend to the economy through this difficult period. Over the last 10 years the banking system has been building up resilience to make sure that this is possible. The FPC had required the banks to build up a counter cyclical buffer of additional capital during the good times, so that it could be freed up when needed so capital would not be a hindrance to lending. This buffer was due to hit 2% by the end of this year, but it has now been immediately reduced to zero, thereby freeing up additional capital that could be used to facilitate £200bn of new corporate lending. This is equivalent to 13x UK banks’ total new lending from 2019, Carney said, adding that the TFSME liquidity would encourage up to £100bn of lending to the sector that might need it most, an amount equating to around 5% of total bank lending.

Our take on all of this is that the central bank has acted in a very targeted and timely way, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system. These measures should meaningfully encourage bank lending, and provide strong support for this very challenging period ahead. From a bank debt standpoint it should be positive, at a time when bank debt has been hit as it is widely seen as high beta, especially so since the financial crisis. We particularly liked Carney’s point as to why this situation is different to 2008 from a banking standpoint. The Bank of England has taken a lead in monetary policies here, now let’s see if the Treasury can impress on the fiscal side. In our view it is about time the UK showed the rest of the world its stronger colours once again after the Brexit debacle. This was a good start.

Having said that, a global problem cannot be solved by one G7 nation alone. Coordinated action from around the globe is what is required. Over to the ECB, who we somehow think will not have quite the same impact, though Christine Lagarde is doing her best to persuade Eurozone nations to open up the fiscal coffers, which is what is really required.