Bank of England Questions Lenders on Readiness for Negative Rates -- Update
By Jason Douglas and Simon Clark
LONDON -- The Bank of England asked British lenders to assess
their readiness for subzero interest rates, a sign that officials
are weighing the merits of a policy that bankers say would heap
problems on a sector already weighed down by Covid-19 and
In a letter to bank chiefs, the BOE said it is seeking
information on banks' "operational readiness and challenges with
potential implementation, particularly in terms of technology
capabilities." The letter said the query wasn't a guarantee that
negative interest rates would be introduced in Britain.
BOE officials had long insisted they didn't think negative rates
were appropriate for the U.K. but in recent months have softened
their stance as the global economy faces a slow, fitful recovery
from the pandemic and the policies implemented to contain it.
"Negative rates are not a positive for U.K. banks," said Joseph
Dickerson, a banking analyst at Jefferies, adding that they send
deflationary signals to consumers and businesses. Negative rates
hurt banks' so-called net-interest margins, or the difference
between what banks pay depositors and charge for loans. "Investors
would view such an event as negative for bank shares," he said.
The shift is the latest example of how the scale of the Covid-19
crisis is pushing central banks and governments deep into new
policy territory. The Federal Reserve is lending to states, cities
and businesses, breaking taboos about who gets money from a central
bank in a crisis. European governments are subsidizing millions of
furloughed workers' paychecks to minimize layoffs.
U.K. banks, including Natwest Group PLC, Barclays PLC and Lloyds
Banking Group PLC, have been among the worst performers in the
stock market this year, down more than many mainland European and
U.S. rivals. As proxies for economic growth, the banks have
suffered from the massive Covid-related economic downturn. The U.K.
had the highest number of deaths in Europe and the economy has
shown only tepid signs of revival.
Bob Wigley, executive chairman of UK Finance, an industry body
representing more than 250 financial institutions, said he expected
the BOE to consider the "implications for banks' business models
and their ability to serve customers which are already impacted by
British banks are further preoccupied with the uncertainty about
Brexit. The U.K. left the European Union in January and a temporary
extension of the trading relationship between them expires at the
end of the year. Negotiations over a new economic pact between the
U.K. and its biggest trading partner are ongoing, but the
last-minute nature of the arrangements has made it difficult for
British businesses to plan.
The wisdom of subzero interest rates is still debated and
evidence for their effectiveness is mixed. The Danish central bank
introduced negative rates in 2012 and the European Central Bank
followed in 2014. Last year, Sweden undid its negative rates
despite tepid growth, figuring the distortions to the economy were
The theory of negative rates goes that by charging banks to hold
deposits at the central bank, lenders will prefer to make loans to
households and businesses instead. This will boost spending and
economic growth. European Central Bank research has shown that
negative rates boosted bank lending. But a 2019 study by former
U.S. Treasury Secretary Lawrence Summers and colleagues found that
by squeezing bank profits, negative policy rates in Sweden prompted
banks to reduce lending rather than increase it.
Investors are split over whether or not the BOE will ever go
through with introducing negative rates, citing, among other
things, the risks to the U.K.'s financial sector and officials' own
mixed views on the subject. U.K. government bond yields of
maturities out to five years trade with a negative yield on
expectations that a subzero policy rate could be in the offing.
Along with the letter to the banks, an accompanying
questionnaire quizzes bank staff about issues such as which
business units would be affected by negative rates and how much
time they would need to make changes to their systems to
accommodate them. It also asked banks similar questions about a
zero policy rate and a system of paying different interest rates on
slices of bank reserves.
Write to Jason Douglas at firstname.lastname@example.org and Simon Clark
(END) Dow Jones Newswires
October 12, 2020 10:33 ET (14:33 GMT)
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