6 July, 2016
The Bank of England has trimmed the capital requirements of commercial banks in its bi-annual Financial Stability report (FSR) published on Tuesday, in an attempt to waive off mounting Brexitrisks, post the June 23 UK referendum.The FSR also describes the current outlook for financial stability as 'challenging', adding that some Brexit risks have already started to crystallise.
The Bank of England (BoE) has cut the countercyclical capital buffer rate for UK banks with immediate effect to 0 percent, from 0.5 percent of financials’ UK exposure, the first bi-annual Financial Stability Report published by the BoE after the UK referendum showed Tuesday. This is turn, is expected to reduce the regulatory capital buffers by USD7.5 billion, which will raise the capacity to lend to households and businesses by about USD197 billion.
In the wake of rising Brexit risks, the report also warned that the nation’s highly leveraged real estate business will fall, which was mainly driven bypiling debts, should employment and growth in income decline in the months following UK’s exit from the European Union. The BoE had announced last week that it would extend its indexed long-term report operations on a weekly basis until the end of September 2016 to provide extra liquidity insurance to banks.
Moreover, the Bank of England governor, Mark Carney said in his speech that there are prospects of an economic slowdown in the British economy. Households are most susceptible to be hurt in the wake of a tougher economic outlook, he added. Further, the BoE expects the CCB to remain at 0 percent till 2017.
The 11-member committee also added that it is closely monitoring any key risks that would impede investor appetite for UK’s assets. Besides, it is also keeping a watch on the commercial real estate market, the vulnerability of indebted households and landlords, the global economic outlook and fragile liquidity in financial markets.
The countercyclical capital buffer was designed to be eased in a situation of downturn, in order to aide lending. Central bank officials also recommended that the Prudential Regulatory Authority, UK’s major bank regulator take in action a plan to reduce the supervisory capital buffers. But for all that the system has coped well so far, there are concerns that market liquidity could dry up and in the event that foreign investors begin to reassess their view of the UK, the challenges would be considerably greater.
The Financial Policy Committee is also watching the potential for buy-to-let investors to behave pro-cyclically and amplify movements in the housing market. Property is one of the key areas that analysts said would be impacted by the vote to leave. A Bloomberg index of house builders has slumped more than 30 percent since the referendum and Standard Life Investments suspended trading in its 2.9 billion-pound UK Real Estate fund on Monday.
"UK’s commercial real-estate transactions are particularly vulnerable to a change in investor preferences," the Financial Stability Report said.
Meanwhile, the report also mentioned that the current account deficit of the country, which stood at 32.6 billion pounds in the first quarter, or 6.9 percent of economic output is high by both historical as well as international standards.
However, to the extent that property is frequently used as loan collateral, reduced property valuations could deter corporate borrowing which would suggest some ripple effect across the wider economy. Outflows from REITs, which appear to have picked up following the referendum, threaten to depress the sector even more given that they represent around 7 percent of all investment in the UK commercial real estate market.
Lastly, the central bank governor also aimed at easing policy stance as it prepares to hold a monetary policy meeting on July 14. However, that would be a careful judgment taking into account any financial stability risks from too-low borrowing costs. Officials also encouraged the use of flexibility in Solvency II regulations in insurance companies to recalculate capital levels as they move between regulatory frameworks, so that they fail to rise as market interest rates fall.
Improved investor sentiment on PGMs and anticipated increases in physical investment purchases in 2016 have prompted an upward revision to our platinum price forecast from the last quarterly review...
The greenback rose to an early high of 103.38, but failed to sustain gains above the 103 level, trading lower at 102.71...
Japanese fixed income assets and its currency are once again proving to be the best haven in turbulent times. Investors just love piling into the country’s bonds and yen, whenever there are signs of trouble and uncertainties...
The French private sector output is expected to have declined for the first time in four month in June, based on the recent flash PMI data for France...
Pattern formed - classic bullish divergence. Potential Reversal Zone- 2060. S&P500 has recovered after making a low of 2063.70.it is currently trading around 2078. Short term trend is lightly bullish as long as support 2060 holds...
One of the major factors that have been pushing crude oil prices higher is supply disruption both planned and unplanned. That supply disruption at one point taken away as much as 2.5 million barrels per day, off the market...
In its March meeting, the European Central Bank (ECB) announced a fresh package of stimulus and one measure of that package -- relating to corporate bond purchases (CBP) -- kicked off on Wednesday...
The Eurozone government bonds traded modestly firmer on Friday as investors were wary of making big moves ahead of US jobs report, which could offer hints about the pace of Fed interest-rate hike...
Major resistance- $1226 (10 day EMA). The yellow metal has jumped after making a low of $1205 yesterday. It is currently trading at $1215. Market awaits ECB policy decision today for further direction...