Bloomberg News

BOE Says Banks Shouldn't Cut Capital Levels to Aid Credit Supply

October 03, 2011

Oct. 3 (Bloomberg) -- The Bank of England’s Financial Policy Committee said it would be “inappropriate” for banks to reduce capital and liquidity levels to stimulate credit supply as members discussed measures to boost financial stability.

“By reducing ratios at a time of elevated risks, market participants might well come to see banks as being more fragile, and they might interpret regulatory advice to cut buffers as a signal that banks were more fragile than previously had been thought,” it said in the minutes of its Sept. 20 meeting published in London today.

“This could lead to a rise in funding costs, which might have the unintended effect of impairing credit availability further,” the report said.

FPC members had discussed whether they could signal that they would be “content for ratios to fall if that were driven by an increase in lending to the non-financial sector.” A number of members said it would be “premature” for banks to run down ratios now given the risk that “larger shocks could lie ahead.”

A report last week from the FPC recommended that banks take “any opportunity” to strengthen capital and liquidity. That report said market strains related to the euro-area debt crisis have dented the outlook for bank earnings and may impede their ability to strengthen balance sheets.

Greek Threat

Euro-area finance chiefs will meet today in Luxembourg to assess the threat of a Greek default and weigh how to shield banks from the fallout as they try to insulate Italy and Spain from the crisis. Greece agreed on new austerity measures at the weekend to help secure a rescue-loan payout and a second European Union-led bailout.

At the Sept. 20 meeting, while some members said there was a distinction to be made between capital and liquidity buffers, others said market perceptions of these were “unlikely to be separated.” They said that reductions in liquidity buffers could “undermine the ability of banks to maintain funding and, thereby continue to support credit supply.”

The interim FPC also said there have been “severe strains in financial markets” since its last meeting in June.

The Bank of England’s Monetary Policy Committee will probably vote for no change to policy at this month’s two-day meeting that ends Oct. 6, according to the median estimate of economists in two Bloomberg News surveys.

--Editor: Fergal O’Brien

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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