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Bank of England urges banks to strengthen reserves Bank of England urges banks to strengthen reserves
(40 minutes later)
The Bank of England's financial policy committee says banks must raise capital to withstand the downturn, particularly that caused by eurozone debt problems. Banks should build up their financial buffers to withstand the downturn and the dangers from the eurozone debt crisis, the Bank of England has said.
>The governor of the Bank of England, Sir Mervyn King, said they needed to build up their capital buffers further to protect against an "exceptionally threatening" environment. >Bank governor Sir Mervyn King said banks needed to boost capital buffers further because of the "exceptionally threatening" environment.
He also said this could involve raising capital by issuing new shares. Sir Mervyn said that the Bank was making "contingency plans" in case of a break-up of the eurozone.
He also said banks should keep lending, but should cut dividends and bonuses. However, he said that he would not go into any details as to what these were.
The committee said said the eurozone debt crisis remained the biggest threat to the UK's banking system. The Bank's financial policy committee (FPC) said the eurozone debt crisis remained the biggest threat to the UK's banking system.
Sir Mervyn told a news conference that the Bank was making "contingency plans" in case of a break-up of the eurozone, although he said that he would not go into any details as to what these were. On Wednesday, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the economy moving.
He added that the UK's banks were among the strongest in the world, with tier 1 capital ratios - an internationally respected measure of a bank's strength - at well above 12%. Sir Mervyn added that the UK's banks were among the strongest in the world, with tier 1 capital ratios - an internationally respected measure of a bank's strength - at well above 12%.
That is higher than they were before the credit crisis began in 2008.That is higher than they were before the credit crisis began in 2008.
Dividends and bonuses
Sir Mervyn said one way for UK banks to gain further strength would be to raise money by issuing new shares.
The FPC also said that banks should keep lending, but should cut dividends and bonuses in order to help build up their financial reserves.
Some bankers argue that tighter capital requirement rules mean lower lending, as banks are forced to hang on to assets as a contingency, rather than pass it on to borrowers.
The chief executive of Royal Bank of Scotland, now part-owned by the UK government, said recently that strict regulation meant investors saw UK banks as a "dumb" place to invest, and that it limited their ability to lend.
The FPC is chaired by Sir Mervyn, and at present only has an advisory role.
Once the legal framework is in place, it is expected to become the country's top financial regulator from the start of 2013.