-BOE FPC Says Banks May Be Overstating Capital Strength

LONDON (MNI) The Bank of England Financial Policy Committee has
said that overall financial stability has improved a little but it
warned that banks may be overstating their capital strength.

The FPC urged the banks’ regulator, the Financial Services
Authority, to ensure banks make a realistic assessment of their amounts
of current capital and future needs. It stresses, however, that in
boosting capital banks must not cut back on lending to the real economy.

The FPC said the FSA should ensure that the capital of UK banks and
building societies reflects a proper valuation of their assets, a
realistic assessment of future conduct costs and prudent calculation of
risk weights, according to the latest Financial Stability Report
published by the BOE Thursday.

In cases where capital buffers need to be strengthened to absorb
losses and sustain credit availability in the event of stress, the FSA
should ensure that firms either raise capital or take steps to
restructure their business and balance sheets in ways that do not hinder
lending to the real economy, the report said.

Although warning that global growth and financial conditions remain
weak, the report also said that the outlook for financial stability has
improved a little since its June report.

The FPC said that actions by the European Central Bank, such as the
announcement of a programme of Outright Monetary Transactions, have
soothed concerns about the euro area crisis, but warned that there
remains a possibility of it all ending badly.

“While the immediate risks have reduced, there remains a
possibility of disorderly outcomes, which if they occurred would have
major implications for UK financial stability,” the report stated.

The report said that UK banks have substantially lowered
their exposure to the troubled eurozone periphery, but their exposure to
the periphery’s non-bank sector remains significant.

The FPC stated that progress by UK banks in raising capital has
slowed, adding that investor confidence in UK financial institutions
remains low.

The FPC said that in recent years UK banks have underestimated and
underprovisioned for costs such as the payouts related to payment
protection insurance mis-selling. The FPC also said that it seems likely
banks could face additional sizable costs for other similar conduct

The FPC also warned that banks’ capital positions could be
overstated due to the aggressive application of risk weights.

Taken in combination, these factors suggest that UK banks’ capital
buffers, available to cushion losses and maintain lending in a stress
scenario, are not as great as headline regulatory capital ratios imply,
the FPC said.

The committee stated that an increase in banks’ capital levels
would improve the overall resilience of the UK banking system and its
ability to support a sustained economic recovery.

The FPC also said that with the Funding for Lending Scheme in
place, there are some signs of improvement in credit conditions looking

“The Funding for Lending Scheme has contributed to a significant
reduction in UK banks’ marginal funding costs, which have been
partially passed through to some lending rates,” the report said.

-London newsroom: 4420 7862 7491 e-mail: wwilkes@marketnews.com

[TOPICS: M$B$$$,M$$BE$]