Watchdog orders the bankers: Hoard less, lend more

Regulator says banks should lower gilt holdings to pump £70bn into economy

Andrew Bailey, the deputy governor of the Bank of England in charge of prudential regulation, yesterday echoed the warning from Sir Mervyn King over the extent of lobbying by bankers of senior ministers.

"There have to be ground rules about how things are done – the very large amount of private lobbying is not consistent with having transparent accountable and open processes where we can be held to account, the banks can be held to account, and the Government can be held to account," Mr Bailey said.

In his final appearance before the Treasury Select Committee this week the outgoing Governor said that some banks had asked ministers to put pressure on the regulator to "back down" in their demands for banks to hold more capital.

The Bank of England's new super regulator, the Financial Policy Committee, yesterday gave banks permission to run down their stocks of liquid assets in order to boost lending to the real economy.

"Some relaxation in liquidity requirements would strike the appropriate balance between achieving resilience and reducing possible impediments to the supply of credit to the economy" said Paul Tucker, the Bank's deputy governor, unveiling Threadneedle Street's bi-annual Financial Stability Report.

Under the Basel international banking regime, banks are required to hold enough easily sellable assets, such as gilt-edged government bonds, on their balance sheets by 2018 in order to enable them to survive a four-week funding drought.

But UK banks are already holding 100 per cent of their Basel requirements. The FPC said that banks would be permitted to reduce this proportion to 80 per cent until 2015, rising to 100 per cent by 2018. The FPC estimated that this could free up around £70bn from banks' balance sheets, which would then be available to support new lending to firms and households.

The banks were first given permission by regulators to deflate their liquidity buffers in June 2012. The latest move reflects a concern among regulators that banks are still being too conservative in their liquidity management regimes, to the detriment of the wider economy. However, the FPC also added that some banks that faced "idiosyncratic liquidity risks" not picked up by the Basel regime might be required to hold bigger stocks of liquid assets.

On bank's capital buffers, the FPC had a tougher message. Following on from last week's announcement that UK banks are being forced to fill in £27bn hole in their balance sheets, the FPC yesterday said that it is planning to force the banks to submit to annual stress tests of their capital adequacy.

"Regular stress testing helps avoid the risk that initiating an exercise is interpreted by the markets as an adverse signal of specific or immediate concerns about the health of the financial sector or a particular firm" said the report.

The FPC also said that it would conduct a regulatory inquiry into the vulnerability of borrowers and financial institutions to "sharp upward movements in long-term interest rates". American and British government bond yields have risen in recent weeks (reflecting falling prices for the assets) as market fears have grown about an imminent end to the Federal Reserve's bond buying programme. The FPC said that the inquiry should be completed by September 2013.

"Financial institutions and markets are also vulnerable to an abrupt rise in global interest rates," said the FPC. "And some UK borrowers remain highly indebted, which could result in losses for UK banks."

Bailey Lobby alarm

Andrew Bailey, the deputy governor of the Bank of England in charge of prudential regulation, yesterday echoed the warning from Sir Mervyn King over the extent of lobbying by bankers of senior ministers.

"There have to be ground rules about how things are done - the very large amount of private lobbying is not consistent with having transparent accountable and open processes where we can be held to account, the banks can be held to account, and the Government can be held to account," Mr Bailey said.

In his final appearance before the Treasury Select Committee this week the outgoing Governor said that some banks had asked ministers to put pressure on the regulator to "back down" in their demands for banks to hold more capital.

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