POLICYMAKERS have considered entirely scrapping rules requiring banks to hold billions of pounds on their balance sheets in an attempt to kick-start lending.
The Bank of England’s Financial Policy Committee (FPC) considered telling regulators to drop demands for banks to retain easily-saleable assets as the eurozone crisis intensified, according to minutes of its June meeting which were released yesterday.
But the 12-strong panel, chaired by Bank Governor Sir Mervyn King, instead agreed to recommend that rules are relaxed to allow lenders to run down their “liquidity buffers“ if needed.
The move was announced last Friday alongside the FPC’s Financial Stability Report and forms part of the Bank’s strategy to help Britain recover from its double-dip recession, following the announcement last month of a £100bn-plus scheme to boost bank lending.
The latest minutes from the FPC, set up to oversee the country’s financial stability in the wake of the credit crunch, come after the Bank injected another £50bn into its quantitative easing programme yesterday in yet another attempt to drag the UK out of recession.
The FPC also agreed that a second objective outlined by the Chancellor – to support growth and employment – was compatible with its wider remit.
Discussing the City regulator’s liquidity guidelines, the FPC minutes said: “Members considered whether there was a case for going further by recommending the suspension or easing of the current guidance. Suspension might provide the clearest possible message to banks that they could reduce their liquid asset holdings.”
But it added that “recognising the benefits that had accrued from the regime over recent years“ the move “did not command support in current circumstances“.
The minutes underlined the FPC’s fears that the outlook for financial stability had “deteriorated“ in light of heightened uncertainty about how and when the eurozone debt crisis would be resolved. The committee said that major UK bank exposure to governments and banks in vulnerable eurozone regions was not high.
However, the FPC added that UK banks had significantly larger exposures to private sector borrowers in many of these countries.
The minutes said banks were suffering from higher funding costs as money markets tighten due to the deepening woes in Europe and these higher funding costs were being passed on to interest rates for corporate and household lending.
The FPC still wants banks to build up longer-term capital reserves that protect them in the event of further financial crisis and to show restraint in paying out dividends and bonuses.
The minutes said the four largest UK banks had increased their cash buffers by £90bn over the past four years.
But the FPC added: “Since the start of 2011, increases in capital ratios had been largely driven by a reduction in risk-weighted assets, with capital levels remaining broadly flat.”