The Bank of England’s financial policy committee has ordered UK banks to raise an extra £25bn in capital without cutting back on business or mortgage lending.
In a report covering its meeting last week, published today, the FPC sought to address FSA concerns that banks are not holding enough capital to cover high risk assets and future conduct risk while also over-valuing assets.
Taken together, FSA measures would have required an extra £50bn of capital but the FPC says some banks already meet Basel III requirements and opted for half that amount.
The FPC called on the Prudential Regulation Authority to impose the “significantly higher” costs without harming business and mortgage lending.
It states: “The PRA should ensure that major UK banks and building societies meet these requirements by issuing new capital or restructuring balance sheets in a way that does not hinder lending to the economy.
“Any newly-issued capital, including contingent capital, would need to be clearly capable of absorbing losses in a going concern to enable firms to continue lending.”
Confederation of British Industry director for competitive markets Matthew Fell says it is crucial that banks have high capital to guard against future shocks.
But he says: “While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice.”
The FPC also said the PRA should ensure banks have credible transition plans to meet the higher targets under Basel III in 2019.
It recommended the PRA should develop proposals for stress testing UK banks to assess capital adequacy and test any threats identified by the FPC.