Plans to free up loan cash revealed

 

Plans to free up billions of pounds of cash held by banks were announced today to help kickstart lending in the latest attempt to ward off a tightening credit squeeze.

The Bank of England said City regulators should tell banks they can tap into large amounts of cash held on their balance sheets if needed in the face of a worsening eurozone crisis.

The Bank hopes the move will offer a substantial amount of cash to lenders, estimating total liquidity held across Britain's banking system at around £500 billion.

On unveiling the Bank's latest Financial Stability report, Governor Sir Mervyn King said: "Our challenge remains making sure the banks are in the best possible shape to weather the storms they are facing and those that lie ahead so they can support lending to the real economy."

He added: "Banks have built up significant assets in recent years. They are in a strong position to withstand a period of market stress.

"But it's very important that they are willing to use them in times of stress to support lending to the real economy."

It is the next plank in the Bank's strategy to help Britain's economy recover from its double-dip recession, following the announcement earlier this month of a £100 billion-plus scheme to boost bank lending.

The Bank is working on a new "funding for lending" scheme, while last week it held its first £5 billion monthly auction under a six-month loan facility programme.

Sir Mervyn confirmed that UK banks were suffering from higher funding costs as money markets tighten due to the deepening woes in Europe.

They have already been passing on half of these increases to borrowers through loan rates, but the Bank warned that credit availability will tighten further if the rises are passed on in full.

The Bank believes today's recommendation to allow banks to make greater use of liquidity cash piles will help ease conditions for borrowers.

But the Bank stressed that it was still vital for banks to build up longer-term capital reserves that protect them in the event of further financial crisis.

Sir Mervyn reiterated calls on banks to rein in bonuses and investor dividends to boost their capital cushions.

He said four out of five of the UK's biggest banks had already reined in their cash bonuses, but more needed to be done.

Efforts to build capital reserves have slowed in recent months and the Bank is recommending the Financial Services Authority (FSA) takes action with banks to strengthen their buffers.

Sir Mervyn said: "It's vital that our banks are sufficiently well capitalised to be able to continue to provide the services on which we all rely. More capital and more lending go together."

This comes amid fears over bank exposure to troubled European countries.

UK bank exposure to governments and banks in vulnerable eurozone regions stands at around £42 billion, but total exposure - including to borrowers - is around £169 billion, according to the Bank.

The Bank said in its report: "Major UK banks' exposures to the most vulnerable economies' sovereigns and banks are low.

"But their exposures to non-bank private sector borrowers in many of these countries are significantly larger.

"Banks in other EU countries are also exposed to vulnerable euro-area countries. If contagion spread, significant disruption would be likely."

It is also hoped today's moves to relax liquidity buffers will allow banks to make better use of the cash boost offered under the Bank of England's £325 billion Quantitative Easing (QE) programme.

The Bank is widely predicted to extend QE in the coming months and minutes of the June rates meeting revealed four of the nine-strong committee - including Sir Mervyn - were narrowly outvoted on more QE.

But fears remain that there are no guarantees the Bank's raft of measures will persuade banks to lend or recession-hit companies to borrow.

Simon Hayes, economist at Barclays, said the Bank's Financial Policy Committee gave no clear indication of how its latest move would directly result in higher lending.

"The Committee was unable to put figures on how much liquidity would be freed up and the implications that might have for lending. As such, the macroeconomic effects of the policy guidance remain unclear," he said.

Today's report was published by the Bank's Financial Policy Committee after its meeting last week.

The Committee was set up to spot risks in the financial system, such as asset bubbles, in the wake of the credit crisis.

PA

News
i100
News
people Emma Watson addresses celebrity nude photo leak
News
The Prostate Cancer Foundation is returning all donations made by Redditors 'in honour' of Jennifer Lawrence and her naked photos
news

Website users raised funds after Jennifer Lawrence nude photo leak

News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
PROMOTED VIDEO
News
news

The Tardis-style house measures in at just 83 inches wide

News
advertising
Arts and Entertainment
Robert De Niro, Martin Scorsese and DiCaprio, at an awards show in 2010
filmsDe Niro, DiCaprio and Pitt to star
News
i100
Life and Style
Red or dead: An actor portrays Hungarian countess Elizabeth Báthory, rumoured to have bathed in blood to keep youthful
health
News
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
science
Sport
England captain Wayne Rooney during training
FOOTBALLNew captain vows side will deliver against Norway for small crowd
News
peopleJustin Bieber charged with assault and dangerous driving after crashing quad bike into a minivan
News
ebooksAn unforgettable anthology of contemporary reportage
News
peopleHis band Survivor was due to resume touring this month
News
people'It can last and it's terrifying'
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Sport
Radamel Falcao poses with his United shirt
FOOTBALLRadamel Falcao's journey from teenage debutant in Colombia to Manchester United's star signing
Life and Style
fashionAngelina Jolie's wedding dressed revealed
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

Front-Office Developer (C#, .NET, Java,Artificial Intelligence)

£30000 - £45000 per annum + benefits+bonus+package: Harrington Starr: Front-Of...

C++ Quant Developer

£700 per day: Harrington Starr: Quantitative Developer C++, Python, STL, R, PD...

Java/Calypso Developer

£700 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, J2EE, J...

SQL Developer

£500 per day: Harrington Starr: SQL Developer SQL, C#, Stored Procedures, MDX...

Day In a Page

Chief inspector of GPs: ‘Most doctors don’t really know what bad practice can be like for patients’

Steve Field: ‘Most doctors don’t really know what bad practice can be like for patients’

The man charged with inspecting doctors explains why he may not be welcome in every surgery
Stolen youth: Younger blood can reverse many of the effects of ageing

Stolen youth

Younger blood can reverse many of the effects of ageing
Bob Willoughby: Hollywood's first behind the scenes photographer

Bob Willoughby: The reel deal

He was the photographer who brought documentary photojournalism to Hollywood, changing the way film stars would be portrayed for ever
Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

Scorsese in the director's chair with De Niro, DiCaprio and Pitt to star
Angelina Jolie's wedding dress: made by Versace, designed by her children

Made by Versace, designed by her children

Angelina Jolie's wedding dressed revealed
Anyone for pulled chicken?

Pulling chicks

Pulled pork has gone from being a US barbecue secret to a regular on supermarket shelves. Now KFC is trying to tempt us with a chicken version
9 best steam generator irons

9 best steam generator irons

To get through your ironing as swiftly as possible, invest in one of these efficient gadgets
England v Norway: Wayne Rooney admits England must ‘put on a show’ to regain faith

Rooney admits England must ‘put on a show’ to regain faith

New captain vows side will deliver for small Wembley crowd
‘We knew he was something special:’ Radamel Falcao's journey from teenage debutant to Manchester United's star signing

‘We knew he was something special’

Radamel Falcao's journey from teenage debutant to Manchester United's star signing
'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York