Bailey Sees Stress Test Guiding Bank Payouts in 2021: BOE Update

Bank of England Governor Andrew Bailey struck a note of caution on how Brexit will constrain economic growth, while indicating he was pleased with market stability in the first week after the transition period ended.

He said it was too early to tell whether this week’s lockdown -- the nation’s third -- will be as disruptive as the first one, or smoother, like the second. He also indicated that bank stress tests this year should take the place of the “guardrails” constraining dividends that the BOE unveiled as it loosened a ban on payouts.

Senior central bank officials answered questions from Parliament’s Treasury Committee for the first time this year in a virtual meeting Wednesday. Others testifying on regulation and the financial system included Sam Woods, chief executive officer of the BOE’s Prudential Regulation Authority, and Donald Kohn, an external member of the Financial Policy Committee.

Timestamps are for local time in London on Wednesday.

Key Developments:

  • GDP could be reduced by 4% over the longer term, Bailey says
  • Bailey says financial job shift from London may be less than estimated
  • Societal adjustments like web shopping made second lockdown easier

Negative Rates Report Due in February (16:07 GMT)

The Bank of England will publish information from its consultation on the viability of negative rates alongside its February Monetary Policy Report, deputy governor Sam Woods said. The bank has received 160 “pretty detailed” responses from financial institutions on how banks would handle such a move, Woods said.

Second Lockdown Had Smaller Economic Impact (15:56 GMT)

The structure of Covid restrictions imposed in the fourth quarter and adaptations made by both consumers and business -- such as online purchases -- meant that the second lockdown probably had a smaller economic impact than the first one in the spring, Bailey said.

That doesn’t mean the third lockdown, imposed this week, will be similarly easier, Bailey warned. “It’s too early to tell,” he said.

BOE as Dividend-Setter Won’t Be the Norm (15:50 GMT)

“It’s not our intention that as regulators we should take over setting dividends,” Bailey said, calling last year’s move to halt banks’ payouts “a very particular and special circumstance.”

Relaxing that move, as the BOE did last month -- with caveats that disappointed some investors -- will take bank dividends back toward a point where “the boards agree them and shareholders vote on them,” Bailey said.

“We have guardrails. Normally the guardrails come from the stress tests, and we didn’t have a stress test last year because of Covid, but we will have one this year -- so we’re heading back to where we normally are.”

House Buyers Constrained By High Prices (15:45 GMT)

The price of property is the biggest hurdle facing new entrants to the U.K. housing market, not mortgage rules, and government policy is a greater determinant of housing affordability than BOE regulations, FPC member Donald Kohn said. In response to concerns expressed by Labour lawmaker Siobhain McDonagh about her constituents’ ability to get on the property ladder, Kohn defended the central bank’s guidance on how much people can borrow. Bailey said the rules are regularly reviewed due to their importance.

GDP Hit of as Much as 4% ‘Probably Right’ (15:15 GMT)

Bailey, who said he takes no position on supporting or opposing Brexit, told lawmakers that the trade deal struck with the EU could cost the U.K. economy as much as 4% of economic output in the long term, as predicted by the Office for Budget Responsibility, versus remaining in the EU. He said the trade deal is roughly in line with what the central bank forecast in November.

“We put in our numbers that in the third year -- the tail end of our monetary policy forecast -- the modelling would give you about 2%, just over 2%” as a reduction to GDP, he said. “But you’re right that the OBR, and indeed our model if you let it play out -- because it affects a very long run, because of the way in which the real side of the economy adjusts -- that something around 3 to 4% for this sort of deal is probably right.”

What happens in practice will depend on how much disruption Britain experiences in the next few weeks, and then how quickly the economy adjusts to the new trading arrangements, he said.

EU Equivalence Position is ‘Problematic’ (14:47 GMT)

Bailey said the EU’s desire to seek more information from the U.K. about Britain’s future financial regulations is “quite problematic” and that it shows the difficulty of using the so-called equivalence process to govern financial regulation. He also said Britain can’t accept financial equivalence at “any price.”

“I fail to see why people want to close themselves off from open markets,” Bailey said. The move of share trading out of London “is leading to is a fragmentation of the markets. There’s obviously the risk that people get less good prices because there’s not the depth and the liquidity. In big-picture, financial-stability terms, it’s manageable.”

‘So Far, So Good,’ Bailey Says on Transition (14:44 GMT)

Bailey said the post-Brexit process has been “so far, so good” -- with financial stability risks mostly mitigated as European share trading headed to the Continent, something that “had been planned for a very long time.”

“A certain amount of business is having to migrate to the European Union,” Bailey said. “Those transitions have broadly happened as far as we can see.”

Bailey also said that finance job losses from Brexit may be less than speculated, estimating that 5,000 positions have migrated to the EU so far.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.