|Bank of England policymakers fear that the £25bn UK lenders have been instructed to raise in new capital this year might not be enough to protect them against escalating losses, minutes to last month’s Financial Policy Committee meeting show.
The revelation that Britain’s banks and building societies may need to boost their loss-absorbing buffers by even more than the controversial target came as the FPC warned that investors were taking “too rosy a view” of the economy.
Last month, the FPC revealed that an analysis of UK lenders’ books found the industry was underestimating its potential losses by £52bn and that they would need to raise £25bn by then end of 2013 to meet regulatory targets.
The call for more capital prompted an angry backlash from Business Secretary Vince Cable, who described the policy as “erroneous” and potentially damaging to economic growth.
However, minutes to the FPC meeting revealed that “some members were concerned that [£25bn] might not provide enough resilience to absorb unexpected losses and support greater lending to the UK economy”.
“Given the partial coverage of the exercise, ongoing economic uncertainties, and high historical loss experience, those members were inclined to put in place additional up-front insurance through a higher capital ratio target,” the minutes said.
Some members also expressed concern about the industry’s high leverage ratios – a measure of total loans made against equity held. The FPC said that loans totalling more than the UK’s £1.5 trillion of annual economic output had been made by lenders “with leverage levels in excess of 40 times equity”.
“That left little margin for error against a backdrop of low growth in the advanced economies, continued threats to stability, and the uncertainties around the FSA’s estimates,” the members said.
Banks and building societies have already begun to raise capital, restrict dividend and bonuses, and restructure in an effort to strengthen their balance sheets. The FPC is worried that until banks are strong enough to absorb potential losses, they will hoard capital rather than lend and, as a result, suffocate the recovery.
The FPC also warned investors against levels of exuberance that have seen stock markets rise by 20pc in less than a year. The gains “in part reflected exceptionally accommodative monetary policies by many central banks”, such as quantitative easing, the minutes said.
They added: “It was also consistent with a perception among some contacts that the most significant downside risks had attenuated. But market sentiment may be taking too rosy a view of the underlying stresses.”