-Adds Detail To Version Transmitted At 0930 GMT

LONDON (MNI) – The Bank of England’s interim Financial Policy
Committee was united in its call to get banks to take decisive action to
remove uncertainty over the adequacy of their capital levels, so that
they can go ahead and raise funds sustainably and boost lending to the
real economy.

The minutes of the FPC’s November 21 meeting revealed that the FPC
believed banks should be able to obtain sustainable funding, without the
use of the BOE’s Funding for Lending Scheme, if they could convince
markets they had adequate capital and were not overstating the amounts
they had.

“Taking decisive action to tackle problems in banks’ legacy
portfolios and remove uncertainty about capital adequacy could help to
rebuild confidence and so enable banks to expand their balance sheets
more quickly to support new lending and the wider economic recovery,”
the minutes said.

Some FPC members argued that the current low market valuations for
some banks were largely due to concerns over capital overstatement.
Other members of the FPC thought they reflected fears over future
profitability.

The FPC continues to tread a fine line, trying to restore market
faith in banks’ stability while getting those same banks to boost
lending to the real economy.

The FPC acknowledged its previous recommendation, that banks could
reduce excessive liquidity buffers, has not fed through to increased
lending to the real economy.

While holdings of cash and securities in banks’ liquid asset
buffers have fallen a little in the second half of this year “this had
so far tended to be used to repay debt rather than provide direct
support to credit growth,” the minutes said.

Domestic credit growth had remained weak “but there were some signs
of improvement looking ahead,” with the BOE’s credit easing scheme, the
FLS, considerably reducing banks marginal funding costs and these lower
costs “had been partially passed through to some lending rates.”

The FPC also returned to the vexed question of bank executive
remuneration, warning that even ‘long term’ performance goals tended to
be three years, a shorter timeframe than the typical credit cycle.

The FPC urged banks to rethink executive remuneration to make it
reflect the full risks the bank management was taking.

“Steps could be taken to ensure that contracts provided sufficient
incentives for executives to consider the full implications for
long-term business performance, which would be desirable from the
perspective of systemic stability,” the minutes said.

The FPC said risks to financial stability had reduced somewhat, but
the euro area risks were still substantial.

“Risks from the euro area had continued to wax and wane in
intensity, but were still considerable. Market concerns about severe
near-term stresses in the euro area had reduced significantly following
a period of heightened concern over the summer,” the minutes said.

-London newsroom: Tel+44 207 862 7491; email: drobinson@mni-news.com

[TOPICS: M$$BE$]