FPC discussed easing liquidity requirements

Members of the Bank of England's new Financial Policy Committee (FPC) have called for a relaxation of the liquid assets requirements for banks to encourage them to boost lending.

The FPC discussed the idea of easing liquidity and capital requirements at its meeting on 20 September, the record of the meeting showed yesterday.

While members agreed that the amount of each bank's capital and liquidity should not be reduced, some thought the ratios of capital and liquidity to assets could be allowed to fall as banks issued more loans.

It was argued that discouraging banks from lending at times of stress could have "positive feedback effects" by cutting overall risk on banks' balance sheets. However, others argued that easing capital requirements might cause investors to see the banks as more fragile and put up their funding costs.

The report from the meeting shows the FPC torn between wanting to keep the banks safe by imposing tough requirements and concern that restricting loans to the wider economy could endanger financial stability.

"Taking all the arguments into account, the balance of opinion on the committee was that it would be inappropriate in current circumstances for banks to reduce capital or liquidity ratios," the meeting record said.