–BOE FPC: FSA Should Disclose UK Banks’ Sovereign Exposure
–BOE FPC: FSA Should Compile Data on Banks’ Sovereign Exposure
–BOE FPC: UK Banks Should Build Capital When Earnings Strong
–BOE FPC: Banks Should Aim Not to Restrict Credit in Times of Stress

London (MNI) – UK banks’ sovereign and banking sector exposures
should be disclosed by British regulators, the Bank of England’s Interim
Financial Policy Committee concluded at its first meeting.

The FPC’s recommendations come at a time of renewed concern over
banking sector exposure to sovereign risks, with a debt crisis raging in
eurozone peripheral states.

In the June minutes, the FPC urged the regulatory body, the
Financial Services Authority, to “ensure that improved disclosure of
sovereign and banking sector exposures by major UK banks becomes a
permanent part of their reporting framework.”

The FPC called on the FSA to compile the necessary data on banks’
sovereign and banking sector exposures.

The Financial Stability Report, also published Friday, highlighted
the risks posed by the stresses and strains in the euro-area as the
biggest threat to UK financial stability.

“The Committee judged that sovereign and banking sector strains in
some vulnerable euro-area economies were the most material and immediate
threat to UK financial stability,” it said.

The FPC noted there was a threat to UK banks if the euro-area
crisis escalated and reached the core countries, warning it could lead
to a tightening of bank funding conditions.

“In conditions of severe stress in the euro-area, this could
increase the risk of losses to UK banks given that their combined claims
on France and Germany represented around 130% of their core Tier 1
capital, with close to half accounted for by claims on banks,” the
minutes said.

The minutes noted stresses could be transmitted due to the
interconnected nature of financial markets.

The minutes said that outside of the major UK banking groups there
was no evidence that other UK banks had significant euro area sovereign
and banking sector exposures.

But the FPC warned that given the extent of the strains in parts of
the euro area, “there was a risk that a fairly broad set of banks could
face funding difficulties if there were uncertainties about their
exposures.”

The FPC’s proposals for increased disclosure could ease the
pressures on the smaller British banks not included in the European
Banking Authority stress tests.

“The Committee advises the FSA to compile data on the current
sovereign and banking sector exposures of other UK banks not subject to
the EBA stress tests. If these exposures are significant, then the FSA
should publish an aggregate estimate,” the report noted.

In other recommendations the FPC said UK banks should take the
opportunity provided by periods of strong earnings to build up capital
in order to ensure credit is not restricted during periods of stress.

The FPC also called on the FSA to monitor closely the risks
associated with what it termed “opaque funding structures”, such
collateral swaps.

Under the UK’s regulatory shake up, the BOE is being given powers
to spearhead financial sector regulation. The FPC, which mirrors the
BOE’s Monetary Policy Committee, comprises top BOE officials and
externals and will meet at least four times a year.

FINANCIAL STABILITY REPORT

The Financial Stability Report, published under the auspices of the
newly created FPC, said that sustained low interest rates had helped
stimulate economic recovery and underpin global financial markets.

It looked at the potential downsides from this period of ultra-low
rates, “while there are a few signs of overheating in localised markets,
there is no evidence of risk being systematically underpriced in
financial markets.”

The report noted that, along with the downside risk to stability
from sovereign and banking concerns, “bond yields internationally are
susceptible to a reversal from current low levels, which might lead to
volatility in financial markets.”

It also warned of the risks from banks, “continuing use of
potentially unstable sources of liquidity.”

The report said that a sudden ‘snap back’ in yields may carry risks
to the global financial system. It said that the banks have been
generating interest income – or ‘carry’ trade – from lending at long
maturities and borrowing short, and any significant flattening of yield
curves could lead banks to incur larger mark-to-market losses.

The report said that low yields, “have been an intended consequence
of authorities’ monetary policies over the last few years,” but warned
that yields could revert to more normal levels.

The report noted that banks have increased their holdings of global
government debt securities from 5.9% to 9.6%.

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