British banks must shore up capital -- BoE
BRITAIN'S banks should build up their capital buffers even further as increased insurance against an "exceptionally threatening" environment still dominated by the eurozone debt crisis, the Bank of England (BoE) said yesterday.
Banks needed to maintain lending to the real economy, but should restrain dividends and bonuses -- and possibly even issue new shares -- to build up these capital levels further, the BoE's interim Financial Policy Committee (FPC) said.
"It is sensible to raise the capital buffer further to improve resilience in light of the continuing threat to UK financial stability," BoE governor Mervyn King told a news conference.
He avoided setting specific capital ratio targets so as not to prompt banks to comply by selling off units or ending loans to businesses in order to push the ratio higher.
In the recent "stress test" of EU banks, UK lenders were not asked to raise any extra capital but the BoE remains cautious.
"There is no simple answer to how much capital banks need to retain confidence," Mr King said. Bolstering buffers would help restore investor confidence and thereby cut the cost of rolling over the large sums of debt maturing in the first half of 2012, he added.
Hector Sants, chief executive of the Financial Services Authority (FSA), told the news conference that banks would have to present their forward capital funding and bonus plans to make sure they were compatible with FSA objectives.
"They have to preset those plans to the FSA before distributing any bonuses,"Mr Sants said.
The ring-fencing of retail arms of UK banks with dedicated capital cushions, a core recommendation of the recent Vickers Commission which set a 2019 deadline, should also be implemented as soon as possible, Mr King said.
Angela Knight, chief executive of the British Bankers' Association, said: "We agree with the governor's analysis that the UK's banks are better capitalised than many of their continental peers, and further strengthening of their finances is continuing."
And in a sign that the FPC does not trust how banks report how indebted they are, it recommends that they be ordered to publish leverage ratios from the start of 2013, two years earlier than international rules require.
The interim FPC issued its first recommendations in June. Currently it only has an advisory role, but new laws are expected to make it Britain's top financial regulation body from the start of 2013.
Its role is to plug a pre-crisis gap by taking a broader view of risks to financial stability and ordering specific actions.
The FPC said the eurozone debt crisis remained the top threat to Britain's banking system.