BoE urges banks to keep the lending taps open

The Bank of England (BoE)  called on lenders on Friday to provide enough credit to companies to see them through the coronavirus crisis as the government closes its emergency lending guarantee schemes.

“It is in banks’ collective interest to continue to support viable, productive businesses, rather than seek to defend capital ratios by cutting lending, which would have an adverse effect on the economy and, therefore, could have an even greater negative effect on banks’ capital ratios,” the BoE said.

Britain’s government is due to close emergency lending schemes to new applications this month.

The BoE’s Financial Policy Committee (FPC) said at the end of its March meeting that banks had large enough capital buffers to absorb “very big losses while continuing to lend.”

Lenders should work “flexibly” with household borrowers as payment deferral schemes unwind, the FPC added in a summary of the meeting.

“The FPC expects banks to use all elements of capital buffers as necessary, to continue to support the economy through the recovery phase,” the FPC said.

After slumping by 10% in 2020, its biggest fall in more than three centuries, Britain’s economy is expected to grow by 5% in 2021.

A countercyclical capital buffer for tapping during periods of market stresses is already set at 0%. The FPC said it would remain there until at least December, so any rise after that would not take effect until the end of 2022 at the earliest.

While banks have resumed paying dividends, in line with “guardrails” set by regulator, their market valuations remain low, a likely reflection of market concerns over expected future profitability, the FPC said.

“Low profitability was still a concern as it limited banks’ ability to generate internal capital,” the FPC said.

Work has started on testing in 2022 the ability of the payments system to recover within a set time period from a cyber attack, drawing on lessons from a pilot in 2019.

“The committee agreed that the 2022 test should target the most systemic contributors in the end-to-end payments chain, as in the event of disruption, their ability to resume services in a timely manner was particularly important for UK financial stability,” the FPC said.

German bonds: Euro zone bond yields edged up on Friday but benchmark German bonds were set for their best weekly performance in more than three months as the bloc’s coronavirus woes supported its safe-haven assets.

Global government bond yields shot up in February on bets that a vast US stimulus package would reignite economic growth and inflation.

That pushed euro zone bond yields higher following US Treasuries, causing concerns about a possible tightening of financial conditions in the bloc as it faces a weaker economic outlook.

But with the European Central Bank increasing the pace of its asset purchases and attention turning to challenges linked to Europe’s slow vaccination rollout, its bond yields have fallen in March, in contrast to bond yields in the United States, which have continued to rise.

On Friday, as European stocks hit one-week highs, the yields on Germany’s 10-year Bund, the safe-haven benchmark for the euro zone, was up nearly 3 basis points to -0.36% at 1003 GMT, after falling to its lowest since mid-February on Thursday.

Bunds continued to outperform US Treasuries on Friday, where the 10-year yield was up 4 basis points in early London trade after a relatively weak seven-year auction on Thursday. Bond yields move inversely with prices.

But down 6 basis points this week, 10-year Bund yields are set for their biggest weekly fall since the week ending on Dec. 11.

On the data front, European investors were watching Germany’s Ifo survey, which showed business morale hit its highest level in almost two years, far higher than the rise a Reuters poll had expected.

This had little impact on government bonds, however, much like the stronger-than-expected business activity surveys on Wednesday.

“Indeed, for the time being, it appears that European government bonds are being more influenced by the ongoing support of the ECB and negative news on the pandemic in Europe,” UniCredit analysts told clients.

The focus of the European Central Bank’s asset purchases is shifting to bond prices from purchase volumes, ECB board member Isabel Schnabel said late on Thursday, after its bond buying rose by a half last week.

The comments suggest that the focus in the coming months will be on yield levels rather than a mechanical fulfilment of a purchase quota.