UK banks do not have enough capital to withstand an escalation in the eurozone crisis, the Bank of England’s risk regulator has warned.
The minutes of the Financial Policy Committee’s (FCP) June 22 meeting state that its members ‘judged that the overall capitalisation of the banking system was unlikely to be sufficient for stability to be assured’ if there were ‘severe but plausible’ developments in the sovereign debt crisis.
The FPC also warned that regulations on banks’ required holdings in cash and other liquid assets may have ‘pushed up the pricing of loans’.
The commiteee suggested a relaxation of the rules so that funds ‘supporting liquid assets could potentially be used instead to finance lending’.
Banks had been hoping for the capital rules to be loosened as well, but the FPC decided the risks to financial stability and the economy were too great.
The FPC minutes said: ‘The committee was concerned that in especially severe, but plausible, adverse scenarios in the euro area some UK banks could face large losses.’
The committee further warned that the overall health of the banks was too weak and threatened ‘the supply of financial services to the economy’.
The position of banks is varied, with Barclays the most exposed of all UK lenders to the most indebted eurozone states.
It has loan and sovereign debt exposures equivalent to 170 per cent of its assets.
Royal Bank of Scotland also has dangerously large total exposures to eurozone countries’ debt.
The FPC warned that banks need to urgently boost their capital holdings because ‘the weak profit outlook for banks would make it difficult to raise sufficient additional capital solely by limiting cash dividends and compensation’.
A fearful Bank of England last month unveiled a ‘funding for lending’ scheme to boost the supply of credit to businesses and households and lower borrowing costs.
It has since loosened the liquidity rules and printed another £50bn under its Quantitative Easing (QE) programme in a bid to stimulate economic growth, taking QE to £375bn or almost 40 per cent of the national debt.
The Bank’s press release on the record of FPC Meeting held on 22 June 2012 said the FPC ‘unanimously agreed the following policy recommendations:
‘The Committee recommends that, taking into account each institution’s risk profile, the Financial Services Authority (FSA) works with banks to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the currently heightened risk of losses. . . that banks work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stress in the euro area.’