LONDON — Britain’s major lenders have been told by the Bank of England that they must set aside a combined £11.4 billion of capital in the next 18 months as a means to protect themselves from the risks of an economic downturn.
In its Financial Stability Report — released on Tuesday morning — the bank increased the so-called counter cyclical capitial buffer (CCB) from 0% to 0.5%, with the expectation that that buffer will be increased to 1% at the next stability report in November.
The buffer is effectively put in place to ensure that lenders do not get themselves into the same positions that they did during the financial crisis, protecting themselves from debt going bad and triggering another credit crunch.
This is done by setting aside capital in good times so that banks can keep lending during a downturn, and are protected if customers lose their ability to make repayments on their debt.
Essentially, it is the banking equivalent of putting money aside for a rainy day.
“As is often the case in a standard environment, there are pockets of risk that warrant vigilance,” the report, compiled by the bank’s Financial Policy Committee said.
Areas of particular concern for the Bank of England include consumer credit and mortgages.
“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions,” the report noted.
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