King orders banks: Stop hoarding and start lending

Lenders urged to reduce their cash reserves and make more credit available Bank

The UK's financial regulators have urged banks to run down their £500bn liquidity buffers in order to keep lending flowing to households and businesses.

Sir Mervyn King, Governor of the Bank of England, made the announcement alongside Lord Turner, chairman of the Financial Services Authority (FSA), as they unveiled the Bank's twice-yearly Financial Stability Report. The two men sit on the new, incoming City super-regulator, the Financial Policy Committee (FPC).

"It is important that banks are willing to make use of their liquid asset buffers in times of stress, in order to support lending to the real economy," said the Governor. "The [FPC] recommends that the FSA makes clearer to banks that they are free to use their regulatory liquidity buffers in the event of a liquidity stress."

This was backed up by Lord Turner, who said that the FSA would be passing on the message to individual banks in the coming weeks. "They are holding buffers on top of buffers. They are holding in excess of what we require of them," he said.

The Financial Stability Report said the outlook for financial stability had deteriorated due to the eurozone sovereign debt crisis, pushing up the funding costs of private banks. It warned they have, in turn, been passing on these costs to households and businesses creating "an adverse feedback loop" for the UK economy.

The report estimates banks are holding about £500bn in liquidity buffers. Andrew Haldane, executive director for financial stability at the Bank, pointed out that this is more than three times the size of the stock of lending to the UK's small and medium-sized firms. If the UK's banks were to run down these reserves down by 20-30 per cent it would release £100bn to £150bn for additional lending.

Paul Tucker, Deputy Governor of the Bank of England, who is tipped as a successor to Sir Mervyn when he steps down next year, said that allowing the banks to run down their liquidity buffers was appropriate since their present problems stemmed mainly from the eurozone crisis rather than their irresponsibility. "The banks have done many things, but they didn't design the [European] monetary union," he said.

Despite the easing of liquidity requirements, the Governor said banks would need to continue to build up their capital buffers so they can cope with potential losses from their eurozone investments.

Sir Meryvn also reiterated his instruction for banks to restrain their dividends and bonuses to do so.

"Raising capital can increase banks' capacity to lend and, if used to build a bigger cushion, can reduce the cost of debt funding" he said.

The Bank and FSA have been accused of contributing to the credit shortage since the 2008 financial crisis by insisting banks build up their holdings of liquid assets.

Buffering up

Don't the regulators usually want the banks to increase their safety buffers?

That's capital. What the regulators are referring to here is liquidity. There is a difference between the two. Capital is the difference between a bank's assets and liabilities, a gap that banks have been ordered to maintain at a certain level. Liquidity is the amount of safe assets a bank holds in order to sell quickly to meet any unexpected liabilities that might arise.

So isn't it dangerous to run this buffer down?

No, because the Bank is making it cheap and easy for private banks to borrow cash from it. Banks now don't need to keep all these liquid assets on their balance sheets because they can always borrow any short-term cash they might need.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea