Bank buffers not working as intended in crisis, says BoE's Saporta

© Reuters. FILE PHOTO: The Bank of England and Royal Exchange are reflected in a puddle as a pedestrian walks past, amid the coronavirus disease (COVID-19) outbreak in London, Britain, November 19, 2020. REUTERS/Simon Dawson/File Photo

By Huw Jones

LONDON (Reuters) - Banks felt a stigma about dipping into their capital buffers to keep on lending during last year's coronavirus-related market turmoil and lessons need to be learned, the Bank of England said on Wednesday.

Markets suffered extreme bouts of volatility in March 2020 when the UK economy went into lockdown to fight the COVID-19 pandemic, starting the worst downturn in 300 years.

Victoria Saporta, the BoE's executive director for prudential policy, said the UK banking system remained resilient through the pandemic and continued to provide credit to the economy.

"The key issue here is that there may be stigma associated with use of a regulatory buffer," Saporta told a BoE webinar.

"At the same time, we should not ignore the evidence that points towards issues with the original Basel 3 vision on buffer usability," Saporta added, referring to the Basel Committee of global regulators who designed how buffers are structured.

The BoE allowed banks to tap their so-called counter cyclical capital buffer, a small buffer on top of their core requirements.

Regulators encouraged banks to tap into other buffers given the magnitude of the crisis, but lenders were reluctant to do so, worried about adverse market and credit rating reactions.

Banks were also having to make provisions to cover loans potentially turning sour because of the lockdowns.

"If a regulatory buffer is not practically usable in the sense that banks do not want to dip into it, then it has little value in helping firms to absorb shocks in ways that keep lending going in bad times," Saporta said.

Regulators need to reflect on the experience gleaned during the pandemic otherwise "we may live to regret it", Saporta said.