opinion

COVID-19 regulation spotlight: FPC and MPC Reports

Gavin Stewart Gavin Stewart

This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.

This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.

Last week saw the simultaneous publication of these two reports, both dominated by the COVID-19 situation. Most commentaries since have focused on the MPC Report (MPR), with its prediction of a V-shaped recovery, a few on the FPC's (FPR). Here, I've aimed to read across between the two, focusing on what they might mean for future regulation.

The FPR will have leant heavily on the MPC analysis, and so its confidence about banks' capital buffers depends on the recovery largely following this extended V shape - a sharp rebound in H2 of 2020, then a more gradual return to its previous path. It's a positive that the FPC judges the system to be resilient enough to withstand the crisis.

The logic goes that, with support from government and the banking system, UK businesses can largely survive the coronavirus intact. Consequently, continued lending now will reduce business failures, and minimise rises in unemployment and household debt. And so banks' credit losses will be smaller than otherwise. 

Evidently, however, if the upward sweep of the V is flatter, then the equation starts to change for the worse. Eventually, this would put pressure on bank capital, and there might also be a return to the volatile markets and liquidity pressures, since eased, that we saw at the start of the crisis. Much of this would land at the door of the PRA.

At this point, it's worth switching focus to the FCA and the longer term impact of the payment holidays and freezes it has put in place, notably for mortgages and consumer credit. While clearly a short term benefit to households, the debts will still be there afterwards, and consumers are unlikely to be any less vulnerable when these temporary measures come to an end. This will worsen if significantly higher unemployment and/or lower wages become part of post-COVID-19 life.

More positively, it's worth remembering that during the financial crisis unemployment rose much less than anticipated and house prices fell much less. So the level of uncertainty is high all round.

Looking ahead, firms will need to plan across a range of scenarios about how they treat their customers as we start to emerge from coronavirus. The FPR and MPR are more positive than they might have been, but at this early stage of the crisis, the planning should above all be flexible and the range of scenarios wide.