FSA eases liquidity rule as it wants banks to lend cash, not hoard it

Britain’s banks have been told they do not have to hold extra capital against new loans made under the £80 billion Funding for Lending scheme launched recently by the UK treasury and Bank of England (BoE).

There had been concerns that rules on leverage were causing banks to hoard cash, starving firms of credit. The FSA said it will no longer require banks to maintain core capital ratios of 10 per cent of their assets, instead setting numerical targets for each bank that will mean they cannot cut back on lending to boost their balance sheet.

The news follows comments in The Scotsman yesterday by BoE policymaker Paul Fisher, who said the bank’s new financial policy committee had recommended such a move.

He said that the committee will consider easing the requirements on banks on a wider basis in order to help the economy when it takes over part of the FSA’s regulatory role next year, with a view to tightening controls if credit starts to expand rapidly again.

The move sees the UK lead the way on a pioneering global strategy to use bank regulation as an economic tool.

The system will be formalised when the financial policy committee takes on responsibility for “macro-prudential” regulation in 2013. Its remit will include ensuring financial markets support the economy as well as preventing a repeat of the financial crisis.