Britain’s banks should build up their capital buffers even further to defend against an “exceptionally threatening” environment dominated by risks from the euro zone, the Bank of England said on Thursday.
Banks need to maintain lending to the real economy, but should cut dividends and bonuses – and possibly even issue new shares – to build these capital levels further, the Bank’s interim Financial Policy Committee said.
And in a sign that the FPC does not trust how banks report how indebted they are, it recommends that they be ordered to publish leverage ratios from the start of 2013, two years earlier than international Basel III rules require.
The interim FPC is chaired by Bank 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.
The FPC said the euro zone debt crisis remained the top threat to Britain’s banking system, and stepped up its calls for banks to raise more capital from its last set of recommendations in September.
“Given the current exceptionally threatening environment, the Committee recommends that, if earnings are insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months,” the FPC said.