BANKS need to raise capital externally if they are to hit regulatory targets and increase lending, rather than shrinking their balance sheets to hit incoming capital requirements, according to the Financial Policy Committee’s (FPC) minutes published yesterday.
In the past the key Bank of England committee has told banks to retain earnings and cut pay to raise capital levels.
But the minutes show the FPC is now concerned that earnings growth will be slow, limiting the capital boost from this source.
Combined with the increased pressure of “weak economic activity and redress for mis-selling financial products and other conduct issues” – such as PPI compensation – it is calling for banks to raise capital externally.
“Recent improvements in market conditions should help in that respect, with the options including debt conversion and the issuance of suitable contingent capital instruments as well as conventional equity,” the FPC concluded.
The Committee warned that raising capital ratios would only help economic growth in the medium-term, as lending will likely shrink, holding back the economy.
However, by making banks stronger and more stable in the medium-term, it hopes the cost of funding will drop, boosting lending and profits in future.
The long-term aim is to build up capital buffers which can be run down in economic downturns, thus boosting lending and so growth.
If the buffers existed, the FPC said it would consider allowing them to be used now, as the economy is flagging. But as the buffers are not yet in place, it favours pushing capital levels higher “in the near term to protect from the heightened risk from the Eurozone.”