The Bank of England said on Thursday that all banks in Britain should build up their capital reserves to have a larger buffer against the “exceptionally threatening” financial environment.
The euro zone crisis, with contagion still not contained, means that banks may suffer from exposure to Portgual, Italy, Spain, Greece, or a number of other highly indebted nations.
The Bank’s interim Financial Policy Committee has issued advice for British banks on how to build up their cash assets. Firstly, they have recommended that banks cut back on dividends and bonuses paid to shareholders and executives.
They have also recommended bringing more shareholders into the fold, by issuing new shares, as a way to build enough capital to protect themselves from a eurozone state’s default.
The Financial Policy Committee (FPC) has also recommended that banks do not stop lending in order to keep growth targets on track.
However, the FPC has suggested that it does not trust how banks are reporting their debt status, as it suggested they be ordered to public leverage ratios starting in 2013. This is two years earlier than the requirements from international Basel III rules.
The interim FPC, chaired by Bank Governor Mervyn King, currently only has an advisory role. However, it is expected to become Britain’s top financial regulation organisation by the start of 2013 due to new laws that are being passed.
Along with other recommendations, the FPC reported what the markets have made known for months: the euro zone debt crisis is the top threat to Britain’s economy, and particularly Britain’s banking system.
Because of this threat, the FPC has told banks to “limit distributions” and “give serious consideration to raising external capital.”
However, analysts say British banks will likely not heed the FPC’s warnings. Banks typically try to shirk what the chief executive of RBS calls “onerous regulation.” Bankers feel that too much regulation makes British banks a poor place to invest, which then hurts the banks’ ability to lend.
Many also feel that further measures are unnecessary, as a key measure of bank stability, Tier 1 capital ratios, were well above 12% for UK banks in the first half of the year. Analysts say this put UK banks among the highest and most stable in the world, and that the percentage was high above levels before the financial crisis.