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Bank of England urges banks to strengthen reserves | Bank of England urges banks to strengthen reserves |
(40 minutes later) | |
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. | 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. |
Bank governor Sir Mervyn King said banks needed to take action because of the "exceptionally threatening" environment. | |
Sir Mervyn said that the Bank was making "contingency plans" in case of a break-up of the eurozone. | Sir Mervyn said that the Bank was making "contingency plans" in case of a break-up of the eurozone. |
However, he would not go into any details as to what these were. | |
Sir Mervyn said it did not make sense to say that there was "a single well-defined event against which we have to make contingencies". | |
He said: "There are many ways in which the future could play out. Maybe it [the eurozone] won't break up, maybe it will continue in various forms, but maybe there will still be questions of default." | |
The Bank's financial policy committee (FPC) 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. |
On Wednesday, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the global economy moving. | |
But Sir Mervyn said that, "ultimately, governments will have to confront the underlying causes". | |
"Resolving these wider problems is beyond the control of any UK authority," he added. | |
Dividends and bonuses | Dividends and bonuses |
Sir Mervyn said 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. | |
Sir Mervyn said one way for UK banks to gain further strength would be to raise money by issuing new shares. | 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. | 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. | 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, the bank now majority-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 banks' ability to lend. | |
The FPC is chaired by Sir Mervyn, and at present only has an advisory role. | 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. | Once the legal framework is in place, it is expected to become the country's top financial regulator from the start of 2013. |