LONDON (MNI) – The following is Bank of England Governor Mervyn
King’s opening statement at the December Financial Stability Report
press conference.
“Faced with a crisis of the euro-area system, we are seeing at
first hand the costs of financial instability.
The symptoms of the crisis have been widely reported. Many European
governments are seeing the price of their bonds fall, undermining banks
balance sheets. In response, banks, especially in the euro area, are
selling assets and deleveraging. An erosion of confidence, lower asset
prices and tighter credit conditions are further damaging the prospects
for economic activity and will affect the ability of companies,
households and governments to repay their debts. That, in turn, will
weaken banks’ balance sheets further. This spiral is characteristic of a
systemic crisis.
Tackling the symptoms of the crisis without resolving the
underlying causes, by measures such as providing liquidity to banks or
sovereigns, offers only short-term relief. Ultimately governments will
have to confront the underlying causes. A loss of external
competitiveness in some euro-area countries has led to current account
imbalances and large build-ups of private and public debt, much of it
external. The problems in the euro area are part of the wider imbalances
in the world economy. The end result of such imbalances is a refusal by
the private sector to continue financing deficits, as the ability of
borrowers to repay is called into question.
Resolving these wider problems is beyond the control of any UK
authority. The responsibility of the Financial Policy Committee is to
focus on measures that can protect and enhance the resilience of the UK
financial system in this threatening environment, and ensure it is
better equipped to counter even more serious potential problems further
down the road. It is crucially important that we avoid causing
individual banks to seek to strengthen their balance sheets in such a
way that, when taken together with similar actions by others, may cause
harm to the wider economy.
So what does the Financial Policy Committee recommend?
First, following its recommendation from September, and given the
current exceptionally threatening environment, the Committee recommends
that, if earnings are insufficient to build capital levels further,
banks should limit distributions and give serious consideration to
raising external capital in the coming months.
This recommendation does not reflect a view on the Committee that
the current level of capital in individual UK banks is insufficient.
Indeed, UK banks are better capitalised than many of their Continental
peers. Rather, it reflects a judgement that it is sensible and desirable
to raise capital buffers further in order to improve resilience in light
of the continuing threats to UK financial stability, while at the same
time enhancing the capacity of banks to provide credit to the wider
economy. That is why the recommendation is framed in terms of levels of
capital and not capital ratios.
It is important that attempts by banks to improve resilience by
adjusting their asset holdings do not reinforce the strains in financial
markets or threaten the supply of credit to businesses and households.
Therefore in its second recommendation, the Committee reiterates its
advice to the FSA to encourage banks to improve the resilience of their
balance sheets without exacerbating market fragility or reducing lending
to the real economy.
It is also important that investors are able to make a clear
assessment of the strength of banks’ balance sheets. The Committee
recognises that concerns about the opacity of the internal risk weights
used by banks in calculating regulatory capital ratios can undermine
confidence in those measures. As a result, leverage ratios, which do not
depend on risk weights, are useful additional indicators of capital
adequacy. Under Basel III banks will have to calculate a leverage ratio
from 2013, although they will not have to begin reporting it until 2015.
Given its potential usefulness to investors, the Committee recommends
that the FSA encourages banks to disclose their leverage ratios, as
defined in the Basel III agreement, as part of their regular reporting
not later than the beginning of 2013.
Alongside an account of the analysis underpinning those
recommendations, the Financial Stability Report covers the progress made
in implementing our previous recommendations. Section 4 describes that
progress. Let me report back briefly on the work completed so far. The
FSAs investigations have shown that the direct exposures of smaller UK
institutions to the banks and governments of the European nations worst
affected by the crisis are small; 3 that current forbearance and
provisioning practices are, by themselves, unlikely to pose a threat to
systemic stability; and that opaque structures such as collateral swaps
and similar transactions employed by exchange-traded funds constitute
only a small part of UK banks’ funding at present.
The crisis in the euro area is one of solvency and not liquidity.
And the interconnectedness of major banks means that banking systems,
and hence economies, around the world are all affected. Only the
governments directly involved can find a way out of the crisis. But here
in the UK, we must try to bolster the resilience of our financial
system, better to withstand the storms that may come in our direction.”
–London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com
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