Bank of England Frees Banks to Lend More After Brexit

The Bank of England took steps Tuesday to shore up the U.K. economy following Britons' surprise decision to exit the European Union, warning that the outlook for the stability of the financial system has become "challenging."

The BOE's Financial Policy Committee said it agreed to lower capital requirements for U.K. banks in a move that should allow them to lend an extra GBP150 billion ($199 billion) to U.K. businesses and households to keep the economy flush with credit.

The decision to reduce the so-called countercyclical capital buffer to zero reverses a decision to raise it taken in March. It said the buffer, an extra tier of equity designed to be reduced in a downturn, will stay at zero at least until June 2017.

"This action reinforces the FPC's view that all elements of the substantial capital and liquidity buffers that have been built up by banks are to be drawn on, as necessary," the committee said in a statement accompanying its biannual Financial Stability Report.

The BOE said it "strongly expects" banks to support the economy with fresh loans after the Brexit vote.

The BOE's decision marks one of the first instances of a major central bank deliberately lowering bank capital requirements to maintain growth in credit to offset an economic shock. Lower capital requirements allow banks to finance loans and other assets with more borrowing and less equity.

The bank's move will be closely watched as a test case of the new "macroprudential" regulatory regime adopted in the U.K. and other advanced economies after the financial crisis. The BOE gained broad new powers over the financial system and an explicit goal of safeguarding financial stability. It has spent the past few years bolstering lenders' financial strength.

Officials warned Tuesday that the stability of the U.K. financial system faces multiple threats in the wake of the Brexit vote. The BOE said it has already detected signs in stock markets and commercial real-estate markets that foreign investors are pulling money out of the U.K. A real-estate fund managed by Standard Life Investments on Monday suspended withdrawals following a spate of redemption requests.

The BOE said some overstretched households might struggle to service their debts if the economy lurches downward. And officials warned that the outlook for the global economy has darkened.

Still, officials stressed the financial system is stronger now than it was in 2008 and 2009, when British taxpayers had to bail out stricken lenders and credit dried up. They also flagged that banks have parked collateral with the BOE sufficient to access more than GBP250 billion of funding if they need it.

"The FPC stands ready to take any further actions deemed appropriate to support financial stability," the panel said.

The move on bank capital comes ahead of expected interest-rate cuts this summer. Economists also anticipate the central bank will revive a bond-buying program that has been on hold since 2012.

Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com