The Bank of England’s Financial Policy Committee said the U.K.’s economic recovery depends on banks doing more to improve capital buffers and rebuild confidence in their balance sheets.
“Where necessary, taking decisive action to tackle problems in banks’ legacy portfolios and remove uncertainty about capital adequacy could help to rebuild confidence and so enable banks to expand their balance sheets more quickly to support new lending and the wider economic recovery,” the FPC said in the record of its Nov. 21 meeting, published in London today.
The record follows the publication of the BOE’s Financial Stability Report last week, which said banks may not have enough provisions to cover potential loans losses or costs related to misconduct. The FPC said while stresses related to the euro area had “reduced significantly,” economic headwinds remain.
The record of the committee’s meeting also showed that some FPC members disagreed on the reason for low market valuations on U.K. banks.
“Some members argued that capital overstatement could account for much of the apparently low market valuation of some banks in the current environment,” the FPC said. “Other members placed more weight on market participants’ low expectations of, and uncertainty about, the profitability of future bank activity as an explanation.”
The FPC said the Bank of England’s Funding for Lending Scheme, which began Aug. 1, had contributed to a “significant reduction in banks’ marginal funding costs, which had been partially passed through to some lending rates.” The BOE said yesterday that banks drew down 4.36 billion pounds from the FLS in the first two months of its operation.
The panel said that while the degree of capital overstatement may vary from one lender to another, overall it was likely to be “material” in the context of the resilience of the U.K. financial system and the capacity of banks to drive the economic recovery.
“The estimated empirical relationship between funding costs and capital buffers suggested that banks would be able to access funding markets at a more sustainable costs, without support from schemes such as the FLS, if capital buffers were expanded significantly,” it said.
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