FPC: Eurozone crisis could freeze credit

 
Julian Harris
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THE ECONOMIC threat from the Eurozone crisis yesterday prompted the Bank of England’s new regulatory body to urge banks to boost lending.

While praising the banks’ recent record in building up buffers of capital, the Financial Policy Committee (FPC) said that bonuses and dividends should be cut in order to release sufficient credit to businesses.

Despite dividends remaining low, some banks have defended their need to provide incentives to attract investment, and argued that competitive remuneration is needed to keep talent.

The FPC -- which is currently merely an adviser to the Financial Services Authority (FSA) -- discussed the possibility of short-term policies “to reduce the risk of a significant disruption to financial stability, and so to the supply of credit to UK households and firms.”

If the supply of credit froze, the FPC warned, the effects “could feed back through the economy to increase pressure on the financial system.”

Noting “severe strains in financial markets”, the FPC warned of “continuing concerns about the sustainability of external and internal debt positions of some countries, especially in the euro area.”

The FPC called on banks to continuing bolstering liquidity buffers, yet also said: “In the event that severe risks crystallised, it would be natural for banks’ capital and liquidity ratios to be run down to ensure that lending to the non-financial economy was not impaired.” On top of limiting dividends and bonuses, financial institutions should look at raising long-term funding, the FPC said.