Watchdog gives early hint of support for banks

A NEW financial watchdog considered making life easier for banks by relaxing tough balance sheet rules in a bid to encourage lending, documents revealed yesterday.

The financial policy committee (FPC), part of the Bank of England, said eurozone debt fears have made it harder for banks to hoard cash to prepare for the shocks ahead while at the same time lending to households and firms.

As a result, it discussed whether banks could loosen their capital or liquidity ratios – cushions that protect financial institutions when they hit choppy water.

Minutes released from the committee’s 20 September meeting, said: “The committee discussed whether it could signal that, while it would not welcome a reduction in levels of bank capital or liquidity, it would be content for ratios to fall if that were driven by an increase in lending to the non-financial sector.”

But ultimately the FPC, set up to oversee the country’s financial stability after the credit crunch, judged it would be “inappropriate” to relax the rules as such a move could be perceived as weakening the banks’ funding positions, which in turn could lead to lower lending.

It was suggested that banks should bolster their resilience in other ways, including adjusting “discretionary distributions” – bonuses and dividends – to reflect any drop in profits.

The FPC, chaired by the BoE’s governor, Sir Mervyn King, currently meets on an interim basis before it is given full legislative powers next year. It said it will continue to debate which tools will be needed to promote financial stability once its powers are finally established.