Bloomberg News

BOE Confronts Case to Ease Liquidity Rules to Stoke Lending

June 22, 2012

Bank of England Deputy Governor Paul Tucker

Paul Tucker, deputy governor of the Bank of England. Photographer: Chris Ratcliffe/Bloomberg

The Bank of England’s Financial Policy Committee may today discuss whether banks’ liquidity requirements should be eased as the panel works together with monetary policy makers to spur U.K. lending.

The 11-member FPC will assess institutions’ buffers as it gathers for a quarterly meeting that marks one year since its creation in a government drive to promote financial stability. Governor Mervyn King, who sits on the panel along with three other members of the Monetary Policy Committee, will present the findings at a June 29 press conference in London.

Deputy Governor Paul Tucker, who is also on both panels, said this month that liquidity rules may be increasing demand for reserves at the expense of lending, a concern shared by some of the MPC in the minutes of its June 7 meeting. An FPC move to address the regulations would signal the two panels are starting to work in tandem on ways to protect the economy from Europe’s debt crisis.

“You don’t often hear the FPC discussed in the minutes, so it’s going to be a very meaty issue,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc (RBS) and a former central bank official. “It looks like they’re going to say banks can run down their liquidity buffers.”

The pound rose 0.1 percent against the dollar, trading at $1.5611 at 9:10 a.m. in London. The yield on the 10-year government bond fell 3 basis points to 1.665 percent.

QE Hindered

Britain’s Financial Services Authority says U.K. banks must maintain a buffer of high-quality liquid assets such as government bonds and central bank reserves to allow them to cope for three and a half months in the event of a liquidity crisis.

Bank of England officials are concerned that an increase in reserves to meet liquidity requirements may impede the ability of their bond-purchase program to aid the economy.

Under quantitative easing, the central bank has bought 125 billion pounds ($195 billion) of gilts since restarting the program in October. During that time, central bank reserves have increased by 106 billion pounds, suggesting U.K. banks have passed on only 19 billion pounds from QE into the economy, said Tom Vosa, an economist at National Australia Bank in London.

Moody’s Cut

“QE isn’t going to work if it builds up in bank reserves,” he said. “Regulators need to think about whether they can reduce liquidity ratios.”

As strains from the sovereign debt crisis in Europe persist, the central bank has activated its Extended Collateral Term Repo facility to provide banks with liquidity against the widest possible collateral. At the first auction, held on June 20, banks were allotted 5 billion pounds of six-month funds.

Moody’s Investors Service cut the credit ratings of the U.K.’s four largest lenders late yesterday, part of a raft of 15 downgrades of global banks as the crisis in Europe intensified. The move may have longer-term effects on operations, forcing banks to post more collateral to trading partners in derivatives deals.

With the Bank of England showing its willingness to provide liquidity, regulators should consider encouraging banks to dip into their stocks, Tucker said on June 12. That in turn “might be helpful to the operation of monetary policy” now that the central bank has injected a “huge amount of reserves” into the financial system, he said.

Liquidity Push

“The regulatory liquidity requirement might be operating, inadvertently, as a de facto reserves requirement,” he said. “If so, our supply of reserves is in part meeting a regulation- inspired increase in demand for reserves, leaving less than we have injected free as a ‘masse de manoeuvre’ for the banks to deploy in expanding their loan books.”

Policy maker Martin Weale said in a speech late yesterday that if banks “could lend more, and do it more cheaply, that could help deliver a more normal pattern of demand growth.”

The central bank’s quarterly Credit Conditions Survey in March showed lenders expected the availability of both secured and unsecured credit to households to decrease in the second quarter. Spreads on secured lending to households and on loans to companies were forecast to widen.

‘Not Helpful’

John Cridland, director general of the Confederation of British Industry, the U.K.’s biggest business lobby, yesterday called on officials to ease the disparity between U.K. and international liquidity rules to encourage lending.

“The U.K.’s gold-plating of internationally agreed reforms is not helpful,” he said in a speech. It’s a “major constraint on banks’ ability to lend.”

King said on June 14 that as central banks are ready to provide “extraordinary amounts” of liquidity, the need for banks to hold large liquid asset buffers is “‘much diminished.’’

For now, the FPC is limited to policy recommendations, as it’s operating on an interim basis while Parliament debates the Banking Bill that will enshrine its powers. It recommended at its last meeting in March that it be given powers of direction over counter-cyclical capital buffers, sectoral capital requirements and leverage ratios.

A recommendation today on bank liquidity would join the ‘‘funding for lending’’ program announced by King that also seeks to boost credit.

‘‘This is the first time the FPC has been in a position to flex its muscles,’’ said David Tinsley, an economist at BNP Paribas SA (BNP) in London and a former central bank official. ‘‘There’s a sense that as the impact of traditional measures slackens that puts more of an onus on other policies.’’

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editor responsible for this story: Craig Stirling at

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