29 June 2012, 18:04  Bank of England Governor: U.K. banks should boost their cash buffers

Bank of England Governor Mervyn King on Friday said U.K. banks should boost their cash buffers to ensure continuous lending and welcomed proposals for establishing a single banking regulator for the euro area. Releasing the central bank's latest Financial Stability Report, King said he personally welcome giving regulatory power to the European Central Bank. Such powers would also provide the Bank of England with a colleague, with which it could talk capital and liquidity problems of major banks in Europe. Banks were recommended to build cushion of loss-absorbing capital to help to protect against the heightened risk of losses, the U.K. central bank said in its half yearly report. It also asked banks to refrain from giving cash dividends and compensation to build equity through retained earnings. King said this cushion may temporarily be above that implied by the official transition path to Basel III standards and would support additional lending to the real economy. Raising capital can increase banks' capacity to lend and, if used to build a bigger cushion, can reduce the cost of debt funding, King said. He observed that the outlook for financial stability has deteriorated, mainly due to uncertainties around euro area economic conditions. This has been reflected in higher funding costs for banks and higher interest rates for household and corporate borrowers in the U.K., the policymaker added. "U.K. banks' holdings of highly liquid assets have tripled since the end of 2008, providing significant protection against potential future funding strains," the report said. Banks are expected to run down these buffers in case of short-term liquidity shocks. "The outlook for financial stability has deteriorated, particularly in light of heightened uncertainty about how, and when, euro-area risks will be resolved," the bank said. In his Mansion House speech earlier this month, King had unveiled new measures to expand liquidity facilities. These included expanded liquidity operations and plans to ease regulatory liquidity requirements.

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