LONDON (MNI) – The Financial Services Authority has moved swiftly
to implement the new guidance from the Bank of England’s Financial
Policy Committee to banks, allowing them to run down liquidity buiffers
at times of stress, FSA Chief Adair Turner told a press conference this
morning.

At the same press conference, BOE Governor Mervyn King lamented the
fact that the FPC had not been successful in persuading UK banks to
issue new capital but things should change once it has full legislative
backing next year, Governor Mervyn King said.

King, speaking following the publication of the FPC’s latest
recommendations, expressed disappointment that banks had not responded
to the committee’s earlier recommendations on capital issuance but
regulators have already moved to implement the FPC’s new proposals for
banks to be able to run down liquidity buffers to help boost lending.

The FPC on Friday urged bank regulator the Financial Services
Authority to allow banks to run down liquidity buffers in stressed
times, with the BOE’s enhanced liquidity operations set up to ensure
banks have all the liquidity they need.

FSA head Adair Turner announced at the same press conference that
they were already acting on the FPC suggestions.

The FSA will issue a press release “which will say that we will
adjust our liquidity guidance in the light of these improved BOE
(liquidity) facilities,” Turner said.

He said the FSA would drive home the point that liquidity buffers
“can be drawn down in the event of liquidity stress and used for the
duration of that period of stress.”

The FPC is keen that banks do not cut back on lending because they
are facing funding stresses, as this would create an “adverse feedback
loop” with reduced bank lending hitting the real economy.

The FPC had previously urged banks to build up capital to reduce
solvency fears and allow them more room to move in stressed times.

“We were not succesful in persuading banks to issue new capital.
The four biggest banks issued a negligible amount,” King said.

The legislation giving the FPC its planned powers has yet to come
into force.

“Clearly the FPC at present has no statutory powers. We can merely
make recommendations,” King said.

“It may be that when we have statutory powers we will be in a
stronger position to exercise that,” he added.

He did believe, however, that the FPC has had some success in
getting banks not to pass earnings straight through to shareholders or
staff.

“The area where I think we have managed to achieve something … is
in our recommendation where we encouraged banks to retain earnings in
order to build a capital buffer rather than increase cash dividends or
cash compensation,” King said.

“Four of the big five banks did cut back the absolute level of cash
compensation, the variable part of it – the cash bonus and in total by
quite a significant amount,” he added.

-London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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