BREXIT: risks to financial stability beginning to 'crystallise', says Bank of England

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

The money will be released from large banks' 'countercyclical' capital buffers, which were introduced in April at a rate of 0.5% of bank assets when weighted for risk. However, banks will not be allowed to increase dividends or distributions to their shareholders as a result of any additional lending activity, according to UK banking regulators.

The temporary removal of the countercyclical capital buffer is part of the Bank of England's "four-point plan" for dealing with the risks to UK financial stability resulting from the recent vote to leave the European Union, according to Mark Carney, the governor of the central bank. Some of these risks have now "begun to crystallise", according to the bank's twice-yearly financial stability report, published yesterday.

Responding to the report, and to the bank's recommendations, the UK's biggest lenders said that they intended to use the extra capital to "support lending to UK businesses and households".

"The last time Britain faced an economic shock the banks were at the heart of the problem," the lenders said, in a joint statement issued by the UK Treasury. "Thanks to the hard work of rebuilding the banks, making them stronger and safer, and the arrival of new challenger banks, banks and building societies are now part of the solution."

However, banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, questioned the extent of the demand for new lending.

"Whilst the easing of the countercyclical capital buffer appears to be welcome news, there must be concerns as to what sort of demand for lending in the UK exists to take advantage of the £150bn now available," he said.

The rate of the countercyclical capital buffer can be increased or reduced by the Bank of England in response to market conditions. It applies to all banks and building societies and certain investment firms, and is designed to protect the banking sector from excess credit growth and the build-up of system-wide risk.

The latest financial stability report identifies a number of risks that have emerged in the immediate aftermath of the referendum. Among these are the impact of "sudden shifts in foreign capital and sharp adjustments in sterling" on the national deficit; the 50% drop in foreign investment into commercial real estate over the first few months of 2016; and delayed "major economic decisions, such as business investment, construction and housing market activity", as a result of "uncertainty" over the referendum.

However, the financial markets have "managed the volatility around the referendum well and have not added to stress", while corporate borrowing costs have fallen as a result of the sharp fall in gilt yields, according to the report.

"Financial institutions, like the rest of us, desire certainty in order to plan for the future," said Mark Carney, speaking at a press conference.

"The Bank has a clear plan. We are rapidly putting its main elements in place. And it is working. The [Financial Policy Committee's] past efforts have created resilient financial institutions which can draw on their substantial capital and liquidity reserves to support the real economy, even during challenging times. The contingency measures we have put in place are addressing the immediate risks from the vote and ensuring that the financial system dampens shocks rather than amplifies them. And the FPC is supporting the real economy, by ensuring that banks can use the substantial capital and liquidity buffers they have in place," he said.

Carney also confirmed that "nothing in financial regulation will change" until the UK had fully withdrawn from the EU.

"The law is the law. Rules are rules," he said.