BoE says bank profitability targets too tough

British banks' targets for shareholder returns are too high, and do not reflect the regulatory changes aimed at making banking a lower-risk, lower-return business, the Bank of England said.

In a record of their November 23 Financial Policy Committee meeting published on Tuesday, policymakers reiterated that the euro zone debt crisis posed the biggest threat to Britain's financial system.

Last week, the FPC issued a series of recommendations for Britain's banks, including building up capital levels by cutting dividends and bonuses - though this could come at a cost, Tuesday's record showed.

In the record of the meeting that led to these calls, the FPC said that one key measure of bank profitability had failed to change to reflect the tougher regulatory environment after the financial crisis.

"While return on equity objectives could have a legitimate role in communicating expectations to investors, current targets appeared to have not adjusted sufficiently to reflect the fact that new capital regulations should have made bank investments lower risk, but also inevitably lower return," the FPC said.

The 11-member committee added that it would return to the issue at future meetings.

The interim FPC is chaired by BoE Governor Mervyn King, and issued its first recommendations in June. Currently it only has an advisory role, but new laws are expected to make it Britain's top financial regulation body from the start of 2013.

Last week, the FPC stressed the importance of continued bank lending to the real economy, and Tuesday's record showed that the committee was concerned that the global Basel rules on bank capital failed to encourage lending to businesses in tough times.

They also expressed general concerns about banks' scope under the Basel system to use their own internal models to calculate their capital buffers.

"Some FPC members thought that ... it would be appropriate to consider whether model-based calculations should be supplemented by minimum risk weights for specific categories of assets."