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Banks need more capital say BoE

The Bank of England has expressed concern that UK banks do not have enough capital to withstand a worsening of the eurozone crisis.

The Financial Policy Committee said that it “judged that the overall capitalisation of the banking system was unlikely to be sufficient for stability to be assured”, if there were severe developments in the sovereign debt crisis.

The FPC is so concerned over weak lending that it is also considering suspending rules governing how much banks hold in cash and other assets to get credit flowing again.

There are concerns that these rules may have “pushed up the pricing of loans”, and a relaxation of regulation could allow liquid assets to be used to finance lending.

These issues were addressed in last week’s Financial Stability Report, when banks were encouraged to continue building up capital levels, and liquidity regulations were slightly relaxed. An easing of these rules could release as much as £150 billion for lending to small businesses and households.

Many Banks were also hoping that the FPC would loosen capital rules, although the FPC decided that the risk to financial stability was too high, despite the fact that UK lenders are “reasonably well placed” to meet new standards next year.

The FPC 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 position of individual institutions varied significantly, the overall health of the banks was too weak and threatened “the supply of financial services to the economy” they added.

Barclays is the most exposed of all UK to the crisis in the Eurozone, with loan and sovereign debt equivalent to 170% of all equity capital.

This was posted in Bdaily's Members' News section by Ruth Mitchell .