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Brexit: Carney cuts bank capital buffers to boost lending

The Bank of England continued its response to the Brexit vote today by freeing UK bank reserves to encourage them to keep lending.

The governor of the Bank of England, Mark Carney, said the central bank had reduced regulatory capital buffers by £5.7 billion to help boost lending to households and businesses.

Because banks leverage their lending, the buffer reduction would allow banks to increase credit supply to households and businesses by £150bn.

“This is a major change. It means that three quarters of UK banks, accounting for 90% of the stock of UK lending, will immediately have greater flexibility to supply credit to UK households and firms,” the governor said.

Speaking at a press conference he said that as a consequence of the 23 June vote, “the UK has entered a period of significant economic adjustment” and that the Bank is putting in place plans it had made for this eventuality “trying to smooth” that adjustment.

The governor reiterated that the Financial Policy Committee is keeping a close eye on the commercial real estate sector which it sees as one of the key risks to financial stability. He said: “It is now more likely that adjustments in commercial real estate could tighten credit conditions for UK businesses.

“Foreign flows of capital into commercial real estate fell 50% in the first quarter of 2016, transaction volumes have fallen further during the second quarter, and share prices of property REITs dropped sharply following the referendum.”

Meanwhile, Aviva become the second large investment manager to close its open-ended commercial property fund. Suspension in trading in Aviva Property Trust today follows Standard Life’s decision yesterday to close its £2.9 billion Standard Life Investments UK Real Estate to redemptions.

Commentators believe the moves are a direct consequence of Brexit, although redemptions had increased earlier this year, before the vote. “Investors are heading for the door…they are leaving the asset class” Laith Khalaf, a senior analyst at Hargreaves Lansdown, told the BBC at lunch-time today.

Also speaking to the BBC, Peter Sands the former group CEO of the UK’s Standard Chartered Bank, stressed that the banking system is in much better shape than it was after the 2008 financial crisis – the last time property funds had to close. And he added that this time, central banks were “on top” of the situation.

But he said “the direction of travel” of the economic adjustment referred to by the Bank governor was clear: “Prospects have been damaged”, he said. “There will be jobs lost in the City, partly because of the passporting which is almost certainly going to fall away….and because euro settlement – clearing and trading – will go.”