The interim Financial Policy Committee has said that capital levels in UK banks remain below a level that would "ensure resilience" against potential eurozone defaults, as it restated the need for dividends and pay to be limited in order to build up reserves further.
Minutes from the latest meeting of the interim FPC, the regulatory body within the Bank of England charged with monitoring UK macro-economic issues, reveal that members believe while the near-term outlook for financial stability has “improved”, conditions remain “fragile”.
At the meeting, held on 16 March, members agreed that the European Central Bank’s longer-term refinancing operations had contributed to better funding conditions for European banks and had a positive effect on the UK banking sector.
In its last meeting in November, the committee had recommended that if earnings were insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months.
Following this recommendation, the Financial Services Authority had discussed with the largest UK banks how they might build capital in the short term, the minutes add.
However, while the committee acknowledged that “some progress” had been made, it remained concerned that capital was not yet at levels that would ensure resilience, and therefore committee members agreed unanimously to maintain the November capital building recommendation.
The committee had also recommended in November that the FSA should encourage banks to improve the resilience of their balance sheets without “exacerbating market fragility or reducing lending to the real economy”.
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