UK banks "still need strengthening"

The Bank of England's Financial Policy Committee says that the UK's big banks do not have enough capital "to ensure resilience in the face of the prospective risks".

So it is advising them to raise external capital as protection against possible future losses "as early as feasible".

In the meantime, this new body - which will soon have statutory powers to enforce its will - is urging the banks to conserve cash, by limiting dividend payments, purchases (or buybacks) of their own shares and cash bonuses.

The reason the Bank of England wants banks to reinforce their protection against shocks is because it fears the eurozone crisis has only been temporarily abated by the trillion euros of emergency three-year loans provided to European banks by the European Central Bank.

The Bank of England says that "questions remained about the indebtedness and competitiveness of some European countries".

Dangerous bubbles

It warned banks with large exposures to the likes of Italy, Spain, Portugal and Ireland - where risks of "persistent low growth and potential credit defaults remained high" - to be "particularly alert to the need to build capital".

Barclays has the biggest retail banking exposure to Spain and Italy of the UK's banks. So there is likely to be to-ing and fro-ing between Barclays and its regulators about whether it has sufficient capital as a protection against what might go wrong in those economies.

We also learned a bit more today about the formal powers the Bank of England would like Parliament to endow it with to prevent dangerous bubbles being pumped up in the financial system.

It wants the ability to instruct the two new regulatory bodies being created out of the soon-to-be-dismantled Financial Services Authority - the Prudential Regulation Authority and the Financial Conduct Authority - to do three things:

  1. impose higher across-the-board capital requirements in boom years (what's known as a counter-cyclical buffer);
  2. set specific targeted higher capital requirements for sectors that are overheating (such as property lending, for example); and
  3. reduce the ceiling on the amount of gross lending a bank can make relative to their capital when the risks in the system as a whole are becoming excessive (a cap on the leverage ratio).

Strikingly the Bank of England also sees the case for having an additional power to impose ceilings on the amount any lender can provide as a mortgage relative to the earnings of the borrower or the value of the relevant property. It thinks that as and when there's a dangerous house market boom, it should probably be able to prohibit 100% mortgages or homeloans greater than two or three times an individual's annual salary.

However it doesn't feel that the general public (you and me) is quite yet ready for such interventionism by an unelected body like the Bank of England. So it wants to see a proper debate before it acquires the power to restrict what kind of loans we can take out when buying a house.

The Bank of England is worried that its reputation would not be enhanced if it was seen as the killjoy restricting every British person's fundamental freedom to borrow more than he or she can afford.