Financial Policy Committee tells banks to raise capital ASAP

The Bank of England (BoE) has warned banks that they must raise external capital as early as is feasible.

The Financial Policy Committee (FPC), which acts as a watchdog for the BoE, published a report expressing its concerns that "capital is not yet at levels that would ensure resilience in the face of prospective risks".

"Immediate financial market tensions have subsided somewhat, but the overall outlook for financial stability remains fragile," the FPC said.

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It acknoweledged that banks have made "some progress" on the Committee's three recomendations from its November 2011 meeting, but said it remains concerned.

The 11 members of the FPC arrived at their decision during a meeting held on March 16th, and said they could make a review of the banks' progress at their next meeting in June.

The Committee also said that "the outlook for financial stability had improved in the near term" and that improvements at the European Central Bank had had a "positive spillover for UK banks".

Credit default swaps premia for the five largest UK banks had fallen from around 240 basis points (2.4 percentage points) to 190 basis points on average and their equity prices had risen by around 35% on average since the first long-term refinancing operation in late December.

UK banks' term debt issuance had also been strong since the start of the year, including issuance in unsecured markets that had previously been closed to some banks, the FPC said.

However, the report emphasised that conditions remained fragile.

"While the ECB's operations had alleviated some of the immediate tensions, questions remained about the indebtedness and competitiveness of some European countries. Banks with large exposures to those countries where risks of persistent low economic growth and potential credit defaults remained high should be particularly alert to the need to build capital."

Next year the Committee will gain new powers that will enable it to force banks to take action to reduce the risks surrounding the financial system as a whole.

The FPC has called for powers to allow it to order banks to increase or decrease capital buffers to stabilise credit supply and to be able to alter the overall leverage ration of banks to determine the amount they can lend.