The Bank of England Friday urged banks to run down their emergency cash buffers to support greater lending to the U.K. economy, even as it warned the risks to financial stability have increased.
The BOE's Financial Policy Committee, a new body tasked with safeguarding the stability of the financial system, said the promise of substantial central bank support meant banks no longer need to hold large reserves of easy-to-sell assets to tide them over a funding crunch.
The BOE said U.K. banks hold some 500 billion British pounds ($777.46 billion) of cash, high-quality government bonds and other ultra-safe assets in their liquidity buffers, accounting for about 15% of their total assets.
"The significant improvement in banks' liquidity positions has placed them in a strong position to respond to market stress by using their liquidity buffers," the committee said in the BOE's twice-yearly financial stability report.
"If banks were willing to use these buffers, without reversing progress made to date on reducing their reliance on short-term funding sources, this could support additional lending to the real economy."
The BOE has long urged banks to maintain thick liquidity buffers and its softer stance reflects deepening alarm in the U.K. at the risks to the nation's banks and economy from the debt crisis in the neighboring euro zone.
The FPC warned Friday: "The outlook for financial stability has deteriorated. Stresses have persisted due to increasing concerns about sovereign debt sustainability, banking sector resilience and imbalances across the euro area."
The move to relax liquidity demands on banks follows the activation earlier this month of an emergency central bank liquidity facility set up late last year. With that scheme in place, banks have less need to "self-insure," the BOE said.
The committee also recommended banks continue to build thicker capital cushions to protect them from any losses if economic conditions in the euro zone deteriorate.
The central bank estimates U.K. lenders' loans to governments, banks and the private sector in vulnerable countries, including Greece, Ireland, Italy, Portugal and Spain, total GBP169 billion.
foxbusiness.com
The BOE's Financial Policy Committee, a new body tasked with safeguarding the stability of the financial system, said the promise of substantial central bank support meant banks no longer need to hold large reserves of easy-to-sell assets to tide them over a funding crunch.
The BOE said U.K. banks hold some 500 billion British pounds ($777.46 billion) of cash, high-quality government bonds and other ultra-safe assets in their liquidity buffers, accounting for about 15% of their total assets.
"The significant improvement in banks' liquidity positions has placed them in a strong position to respond to market stress by using their liquidity buffers," the committee said in the BOE's twice-yearly financial stability report.
"If banks were willing to use these buffers, without reversing progress made to date on reducing their reliance on short-term funding sources, this could support additional lending to the real economy."
The BOE has long urged banks to maintain thick liquidity buffers and its softer stance reflects deepening alarm in the U.K. at the risks to the nation's banks and economy from the debt crisis in the neighboring euro zone.
The FPC warned Friday: "The outlook for financial stability has deteriorated. Stresses have persisted due to increasing concerns about sovereign debt sustainability, banking sector resilience and imbalances across the euro area."
The move to relax liquidity demands on banks follows the activation earlier this month of an emergency central bank liquidity facility set up late last year. With that scheme in place, banks have less need to "self-insure," the BOE said.
The committee also recommended banks continue to build thicker capital cushions to protect them from any losses if economic conditions in the euro zone deteriorate.
The central bank estimates U.K. lenders' loans to governments, banks and the private sector in vulnerable countries, including Greece, Ireland, Italy, Portugal and Spain, total GBP169 billion.
foxbusiness.com
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