So is it fear of stigma about breaching buffers, or is it precautionary capital raising in the face of uncertainty and/or concerns about capacity to rebuild depleted capital? For the UK, we can disentangle these effects in two ways. First, unlike some other studies, the Bank team’s analysis controls both for banks entering the pandemic with differing levels of headroom to minimum requirements, and for the profitability of banks when entering the crisis. Each of these should go some way to mitigating this concern. Second, the stress tests run by the Bank in May 2020 projected major UK banks’ CET1 ratios to fall but remain well in excess of minimum capital requirements. And, ‘reverse stress tests’ carried out by the FPC in August 2020 showed that the economic outcome from Covid-19 would need to be much worse than the central projection in order for it to deplete regulatory capital buffers.21 So while uncertainty was high, banks appeared resilient against scenarios that were materially more adverse. Moreover, the empirical results reported under the second approach on the value of releasing the CCyB, both from the UK and abroad, should not be affected by this challenge as this action converts a regulatory buffer into a management buffer. This would not have altered banks’ concerns about breaching minimum requirements. Taken together, these all point more to fear of stigma from breaching regulatory buffers being the main driving factor. Policy implications Effective regulators are forward looking, looking ahead to the next crisis.
The forward exchange and options markets have expanded in recent years. A deeper market reduces transaction costs and it is easier to find counterparties. This has provided companies with greater scope for hedging against exchange rate risk. Instruments that reduce the risks associated with a floating krone are increasingly being used, also in Norway. Hedging against fluctuations in the krone involves costs for businesses. A krone that is stable - but too strong - also entails costs to the economy in the form of low activity. Similarly, a krone that is stable but weak - is a source of high inflation. Petroleum revenues generally provide substantial, but uneven currency inflows into Norway. The currency flows might have resulted in a strong krone and large variations in the exchange rate. This tendency is countered, however, when the annual use of petroleum revenues over the central government budget is predictable and independent of annual revenue flows, and the remaining revenues are saved and invested abroad. The capital outflows through the Government Petroleum Fund contribute to both curbing the appreciation of the krone and maintaining its stability. Higher oil prices have resulted in higher current account surpluses. In isolation, this contributes to strengthening the krone. However, higher surpluses are being offset by higher long-term capital outflows through the Government Petroleum Fund. In addition, the oil companies primarily invest their cash surplus abroad. Foreign trade figures indicate that mainland imports have increased sharply in recent months. This increases demand for foreign currency.