Financial Policy Summary and Record - March 2021

Covid continues to pose challenges for households and businesses

Covid continues to put a big strain on UK businesses’ earnings, and is threatening the livelihoods of many people. Vaccines should help the UK economy recover rapidly later this year.

Since the start of the pandemic, businesses have raised substantial funds from banks and financial markets to weather the economic disruption. With the support of government guarantees, they have borrowed nearly £90bn in 2020, compared to around £20bn in 2019. 

Businesses will need further support in the months ahead even as the UK economy recovers. 

Our job is to make sure the financial system functions effectively so that banks and financial markets can continue to support households and businesses in the UK in good times and in bad.

The UK banking system is strong enough to keep supporting UK households and businesses

Our tests have shown that UK banks are strong enough to keep supporting households and businesses as they continue to deal with the impact of Covid. Banks have high levels of capital. This would allow them to absorb very big losses while continuing to lend.

It is in banks’ own interest to continue to support the economy by lending to viable, productive businesses. If these businesses are not able to meet their financing needs, this could deepen the economic stress and trigger losses for banks on their loans. 

Since the start of the pandemic, we have safely reduced the cushion of capital that banks need to hold to absorb potential losses. This means banks have more capacity to lend.

Progress is being made to strengthen financial markets so that they can support the economy better, in good times and in bad

Financial markets play an important role in supporting the economy.  They provide finance to businesses, and they help households and businesses manage financial risks and investments.

At the start of the Covid pandemic, central banks had to act to stabilise important markets which were not functioning normally.  There is a risk this could happen again.

Because of the global nature of financial markets, we are working with our international counterparts to address problems here and abroad, to make these markets more resilient to future shocks.

As part of this, we are reviewing financial stability risks that arise in certain types of investment funds. This will ensure that there is more consistency between the ease with which investors can access their money and the ease with which a fund can sell its assets. Such consistency will support financial stability and give greater certainty to investors. Read the findings of a survey of open-ended funds by the Bank of England and Financial Conduct Authority to find out more. 

Open-ended funds will need to:

New types of long-term financial investment can help to support the UK economic recovery

As the economy recovers, the financial system will play an important role in supporting sustainable economic growth. 

New ways of investing in long-term projects might be needed to: support infrastructure; ensure businesses can continue to innovate and grow; and contribute to the UK government's commitment to reach net zero carbon emissions by 2050

We have therefore established an industry working group with other UK authorities to help develop these new ways of investing.

The UK is committed to work with the EU towards a safe open financial system. 

The UK transitioned to a new relationship with the EU in January 2021 with minimal disruption to financial services. UK authorities and financial sector firms had made extensive preparations over the past four years in order to be ready.

We remain committed to working with EU authorities towards a safe and open financial system. Close cooperation between regulatory authorities is essential to manage financial stability risks.

Financial Policy Summary and Record