Bloomberg News

BOE Says Capital-Raising Needs Outweigh Risks of Tapping Market

December 06, 2011

(For more on the region’s debt crisis, see {EXT4 <GO>}.)

Dec. 6 (Bloomberg) -- The Bank of England’s Financial Policy Committee said the need for banks to raise capital to strengthen the resilience of the financial system outweighs the risks associated with entering a “stressed market.”

The FPC made the comments in the record of its Nov. 23 quarterly meeting, where it repeated recommendations published on Dec. 1 on ways to improve financial stability in light of the debt crisis in Europe. One of the recommendations was that banks “give serious consideration” to raising external capital.

The FPC “recognized that there were risks associated with attempting to raise fresh external capital in a stressed market environment,” the report said today in London. “These concerns were outweighed by the potential benefits of raising additional capital to the resilience of the system as a whole.”

Bank of England Governor Mervyn King urged banks last week to enhance efforts to bolster their defenses against the euro area’s debt turmoil, which now looks like a “systemic crisis.” The FPC recommended the Financial Services Authority encourage banks to disclose leverage ratios to investors by the start of 2013, and said that if banks’ earnings aren’t enough to build capital, they should limit payments of bonuses and dividends.

In today’s record of the meeting, the FPC said that dividend policy “should be used actively” and it saw a “strong case for limiting distributions to staff, although this might not be costless.”

The FPC also noted that encumbrance, or the availability of assets to unsecured creditors in a default, was rising. It said heightened uncertainty about encumbrance levels “might have further contributed to the increase in banks’ unsecured funding costs and could have hindered primary debt issuance.”

On central counterparties, it said they should have effective risk-management processes and should introduce “loss- allocation rules” to provide transparency to CCP participants.

The FPC also said that the impact of higher funding costs for banks had so far been “relatively muted.” Nevertheless, if funding stresses persisted, “credit conditions could be expected to tighten materially in 2012.”

--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: Craig Stirling at cstirling1@bloomberg.net


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