LONDON (Reuters) – The rules surrounding banks’ risk buffers may need to change to encourage lenders to tap their capital and avoid a squeeze on credit following the coronavirus pandemic, Bank of England Deputy Governor Jon Cunliffe said on Thursday.
Even though regulators have given banks the green light to dip into buffers to help businesses survive the COVID-19 hit to the economy, there was a “first mover disadvantage” to doing so as it could limit dividends and other payouts, Cunliffe said.
“We will need to think through this question more as the recovery – albeit a bumpy one – gathers pace, as impairments mount and it becomes clearer how permanent the damage will be,” Cunliffe told an online event hosted by the Washington-based Peterson Institute for International Economics.
When a bank breaches its capital conservation buffer, the lender cannot pay bonuses to staff or dividends to investors.
Since economies went into lockdown in March to fight the pandemic, governments have backed the loans offered by banks, but this relief will be phased out in future.
Policymakers worry banks will then become warier of lending to struggling businesses.
Regulators such as the Bank of England and the global Basel Committee, which designed the capital buffer rules used across the world, have repeatedly said that lenders would be given sufficient time to rebuild buffers.
“Looking to the future, we may want to revisit the balance between the various capital buffers, with a view to having more in countercyclical buffers that are releasable by regulators, and less in the fixed buffers,” Cunliffe said.
(Editing by Toby Chopra)