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Treasury select committee warns FSA on liquidity squeeze

The chairman of the Treasury select committee has written to the Bank of England and the Financial Services Authority to raise concerns about the negative impact the squeeze on banks’ liquidity is having on their ability to lend.

Andrew Tyrie is warning that stringent regulatory requirements are damaging banks’ ability to support the economic recovery.

In a letter to Hector Sants, chief executive of the FSA, Tyrie says the TSC wants reassurance that the regulator is carefully examining the effects of post-crisis regulatory action and market responses to it.

He says while Basel 3 requirements are yet to come into force, the financial markets are already monitoring banks’ performance against this standard, putting pressure on them to take early action.

Tyrie says: “Partly as a result, banks are competing aggressively for stable sources of funding, such as retail deposits. This has added to their caution in lending.

“These pressures are now compounded by the effects of the euro area sovereign debt crisis, which has made it harder still for banks to find stable funding.”

He adds that while quantitative easing may be good policy, it does little to increase the supply of liquid assets to banks.

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