Bank of England governor Mervyn King has defended moves by banks to sell assets at a loss, saying the sales reduce leverage ratios.
Some banks have recently sold healthy assets at a discount to bolster their balance sheets. These disposals often involve haircuts of up to 50 per cent, after which equity funds buy the assets at around 80p in the pound.
King told the Treasury select committee last week this is justified because it reassures the markets.
He said: “One of the reasons why some banks feel like this is a good idea is although they are taking a hit on profitability by selling the assets at a discount, on the other hand, they are reducing the size of the balance sheet and hence the leverage ratio of the bank, and that is something that gives reassurance to markets.”
Before the hearing, bank deputy governor for financial stability Paul Tucker warned banks to increase the capital they hold because of risks from the eurozone debt crisis.
King told MPs it is impossible to say how much capital banks should hold in light of the problems in the eurozone.
He said the discrediting of the pre-crisis belief that minimal capital levels would be sufficient has robbed markets of the ability to judge what is needed. He said: “Markets are very nervous as they have no experience to calibrate how much banks need to have.”