The Bank of England (BoE) stands near to an office building in the City of London, U.K. (Photographer: Chris J. Ratcliffe/Bloomberg)

Carney's Crisis Powers Beefed Up to Give BOE $1 Trillion Arsenal

(Bloomberg) -- Mark Carney’s Bank of England has new powers that allow it to raise a war chest of more than 750 billion pounds ($1 trillion) -- without permission or protection from the government.

Under a new financial framework, the bank could unilaterally lend more than that amount if it needs to step into action to keep the banking system -- and the economy -- on an even keel.

The change further embeds the expanded crisis-fighting role of the central bank since the 2008 recession, while it could also enhance its ability to deal with upheaval related to Brexit. The issue of banking -- and London’s access to EU markets -- is set to be one of the trickiest parts of the withdrawal negotiations. And if Brexit goes badly, the bank doesn’t have much room to cut interest rates because they’re already very low.

The announcement of the change came hours after the BOE’s latest monetary-policy decision, in which Chief Economist Andy Haldane unexpectedly voted for an interest rate increase, raising the chance of a hike at the next meeting in August. The BOE also amended its guidance on the future sale of assets bought under QE.

Haldane joins the hawks, BOE amends guidance on QE unwinding

The plan, which Governor Carney described as "groundbreaking,” involves a 1.2 billion-pound capital injection into the BOE by the government. In return, the BOE will take more risk onto its balance sheet.

In a speech late Thursday, Carney didn’t specifically say the changes to the crisis measures were pre-emptive steps in case of a disorderly Brexit, but he did note the BOE’s contingency planning before the EU referendum in 2016. He said the central bank was tested then and it was more than up to the task.

“Today marks a step change in our ability to provide the liquidity that the new finance may eventually require.... We now have a balance sheet fit for purpose. One that reflects the Bank’s much wider range of responsibilities including banking supervision, macro-prudential policy and resolution.” -- Mark Carney

Carney said last month that the BOE may need to use non-standard measures to stimulate the economy in a future downturn if it can’t tighten policy quick enough before then. The problem isn’t unique to the BOE, and former U.S. Treasury Secretary Lawrence Summers warned this week that developed countries are badly equipped for another recession.

In the wake of the Brexit vote in 2016, Carney introduced the Term Funding Scheme to provide cheap loans to banks to ensure that low interest rates were passed on. It wound down that 127 billion-pound facility in February. But now it can deploy the same strategy again without having to seek permission or an indemnity from the Treasury.

The BOE’s central assumption is that Britain will avoid a cliff-edge scenario when it finally leaves the EU. But Carney, who leaves the bank at the end of June 2019, has repeatedly said the institution is ready for whatever happens.

The European Commission has ruled out full passporting rights, which would allow the U.K. to sell services freely in the single market. Speaking alongside Carney at the annual Mansion House dinner in London’s financial district, Chancellor Philip Hammond rejected the EU’s idea of “equivalence” for banks, indicating the continued divide between the two sides.

The U.K. central bank’s new powers don’t mean that it could take on any level of risk. If it’s particularly high, the BOE will consult with the Treasury and seek indemnities where necessary, Carney said.

The move provides the BOE with more leeway to support commercial banks and the economy. In effect, it gives the central bank another permanent tool to reduce financial instability.

©2018 Bloomberg L.P.

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