Banks may be asked to exceed Basel III, says Bank of England
The Bank of England’s financial policy committee (FPC) has warned banks they may have to increase capital buffers beyond the Basel III requirements if they are to weather the European debt crisis.
Depending on the their risk profile, banks may be asked to temporarily exceed the loss-absorbing capital levels laid out as part of Basel III. This extra capital would also be expected to facilitate lending.
“[The] cushion may temporarily be above that implied by the official transition path to Basel III standards and would support additional lending to the real economy, including via the planned ‘funding for lending’ scheme,” the FPC reports.
“Banks should continue to restrain cash dividends and compensation in order to maximise the ability to build equity through retained earnings.”
There was no suggestion heightened levels of capital should be made permanent. The FPC stressed measures should be considered a temporary guard against the risks emanating from the sovereign debt crisis.
“The committee recommends that banks work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stressin the euro area,” it adds.
In anticipation of a potential liquidity crisis, the FPC recommended the FSA makes clear that banks are free to use their regulatory liquid asset buffers in the event of a liquidity stress.
Financial stability could be better achieved by banks improving the usefulness of existing data rather than focusing on releasing more.
“The committee therefore recommends that UK banks work with the FSA and British Bankers’ Association to ensure greater consistency and comparability of their pillar 3 disclosures, including reconciliation of accounting and regulatory measures of capital, beginning with the accounts for the current year.”
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