Banks urged to bolster finances

UK banks have been urged to strengthen their capital balances as the European sovereign debt crisis continues to threaten the economy.

The latest Financial Stability report from the Bank of England was published by the interim Financial Policy Committee (FPC), which was formed after the Government planned fundamental changes to the system of financial regulation in June 2010, following the credit crisis.

Introducing the report the Governor of the Bank of England, Mervyn King said: “The responsibility of the Financial Policy Committee is to focus on measures that can protect and enhance the resilience of the UK financial system in this threatening environment, and ensure it is better equipped to counter even more serious potential problems further down the road.”

King continued to say that the recommendations do not mean that UK banks have insufficient capital, but described the measure as ‘sensible’. The capital could be raised externally by issuing new shares, as opposed to reducing loans.

“It is important that attempts by banks to improve resilience by adjusting their asset holdings do not reinforce the strains in financial markets or threaten the supply of credit to businesses and households. Therefore in its second recommendation, the Committee reiterates its advice to the FSA to encourage banks to improve the resilience of their balance sheets without exacerbating market fragility or reducing lending to the real economy,” he said.

A crisis in the Eurozone could push the UK into a recession, and we must protect ourselves as much as we can, King concluded: “The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all affected. Only the governments directly involved can find a way out of the crisis. But here in the UK, we must try to bolster the resilience of our financial system, better to withstand the storms that may come in our direction.”