LONDON (MNI) – The minutes of the Bank of England’s Financial
Policy Committee revealed some members doubted regulators could boost
credit supply under current conditions, and urging banks to make more
credit availability would be fruitless.

The FPC at its September meeting looked at the argument for calling
on banks to lower their capital ratios, or at least slow their build-up,
to help support stressed financial markets and aid the economic
recovery.

The FPC minutes showed some members doubted there was much the
regulators could do to influence bank lending and capital-raising
activity at present.

A number of members “argued that in current conditions it was
likely that market, rather than regulatory, requirements were the
binding constraint on banks’ behaviour, so signals from regulators were
unlikely to stimulate credit availability,” the minutes said.

The majority view on the FPC was that at some stage banks should be
encouraged to release capital buffers, but the time had not yet come.

“As banks progressed towards their new Basel 3 requirements, it
would be possible for buffers to be released counter-cyclically while
maintaining confidence in banks’ resilience to stress, they doubted that
this point had yet been reached,” the minutes said.

“The Committee felt that, in such circumstances, it would be
important for the Committee to explain clearly why falling ratios would
support, rather than impair, the overall stability of the system as a
whole and the lending it provides,” the minutes added.

On balance the FPC concluded “it would be inappropriate in current
circumstances for banks to reduce capital or liquidity ratios.”

The detailed conclusions of the FPC meeting were published last
week but the debate highlights the problems facing the regulators.

The minutes noted the “severe strains in financial markets,”
largely stemming from the euro area sovereign debt crisis.

They noted UK banks had fared better than some of their euro area
counterparts and their “CDS premia had also risen, although by less
overall than those of some euro-area banks. That was consistent with UK
banks. direct exposures to vulnerable sovereigns being relatively
limited.”

The FPC noted, however, that UK banks were still vulnerable to the
peripheral euro area strains because they faced counterparty risk from
banks in the core euro area economies, which in turn have exposure to
the periphery.

“One consequence of the strains in financial markets had been the
virtual closure to banks of public term unsecured funding markets. There
had been very little senior unsecured term debt issued by banks in
public markets in Europe since May,” the FPC noted.

The FPC’s fear was that the strains in the financial markets would
feed through to a squeeze on lending, hitting the already weak real
economy and creating an “adverse feedback loop.”

“Market intelligence suggested that some tightening in lending
standards had already begun, or was about to begin, across a number of
banks in Europe,” it said.

“A further tightening of credit conditions could lead to an adverse
feedback loop between weaker activity and a deterioration in credit
quality, both in the United Kingdom and the euro area,” the FPC said.

–London Bureau; Tel: +442078627491; email: drobinson@marketnews.com

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