Bank of England announced to lenders that it is raising the country’s counter-cyclical capital buffer from 0 to 0.5% to mitigate pressures from increasing consumer credit. The counter-cyclical capital buffer is a requirement on all banks, lenders and investment firms to keep a certain level of capital when credit growth is excessive. To a certain extent, this buffer is able to insulate banks from the cyclical growth and downturns of the economy. Bank of England’s decision reflects its interests in slowing down credit and lending in the British economy.
By raising the counter-cyclical capital buffer to 0.5%, British banks must increase their held capital by over £11.4 billion over the next 18 months. The Bank of England also has the intentions of further increasing the buffer by 0.5% to 1% by the end of 2017 to combat increases in consumer credit and lending. The counter-cyclical buffer has only been used once in the UK, but was quickly revoked due to stagnate economy conditions during the immediate aftermath of Brexit.
Bank of England’s Financial Policy Committee warned that there …