BRITAIN'S HEADLESS CHICKENS
THE ECONOMIST wrote, while politicians run around like headless chickens, the Bank of England, at least, is trying to stabilise the British economy. Within hours of the announcement of the EU referendum result, Mark Carney, the bank's governor, reassured investors that the economy was sound. And on July 5th, through a piece of arcane but important financial regulation, the bank took the first real step to promote financial stability when it announced the relaxation of capital requirements for banks, in a bid to stave off a credit crunch.
Earlier this year Britain was experiencing rapid credit growth. In March the bank's financial-policy committee thus announced that it would raise the "countercyclical capital buffer" (CCB), a requirement for banks to have an additional cushion of capital to absorb unexpected losses. The CCB was to increase from 0% of banks' loans in Britain to 0.5% in March 2017, eventually rising to 1%. This would have required banks to have about £10 billion ($13.1 billion) in extra equity funding, making the financial system more resilient in the case of a credit bust.
Following the referendum everything has changed. The proportion of loans that are not repaid to banks may soon rise. In theory this puts banks' own creditors, including ordinary depositors, at greater risk. This is why the banks' capital, including the money paid in by their shareholders, is so important: if losses materialise, the banks' shareholders take the hit first. But in these uncertain times raising lots of new capital could be tricky; if banks found themselves unable to do it, their lending capacity would shrink instead and a credit crunch could ensue.
For that reason the bank has today reversed its earlier decision to raise the CCB. It also said that the buffer would not be increased for at least another year. The hope is that with such assurances, banks will be more prepared to extend credit to businesses. This is crucial: a fundamental source of Britain's recent economic woes—including stagnant productivity and real wages—is a malfunctioning credit market.
In the press conference following the announcement, Mr Carney emphasised that adjusting the CCB was just one of many things the bank is doing to promote financial stability. A series of stress tests of Britain's banks last year exposed them to a shock far greater than that which was seen in the immediate aftermath of the referendum (all of the banks passed). Mr Carney has also hinted that at the next meeting of the monetary-policy committee on July 14th, some form of monetary loosening—say, a cut in interest rates, or further quantitative easing—will take place.
Politicians have been less sure-footed. On July 4th George Osborne, the chancellor of the exchequer, promised to cut the rate of corporation tax from 20% to 15% at some point in the future, to show that post-Brexit Britain was still business-friendly. (The tax was already due to fall to 17% by 2020.) The direction of travel may be promising: corporation tax is poorly designed and encourages avoidance and evasion. But it is an awkward about-face from Mr Osborne, who before the referendum warned that a vote for Brexit would trigger rises in income tax and cuts in public spending. And aggressive tax competition will surely irritate the rest of the EU, just as tricky Brexit negotiations loom.
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