* Banks expect FPC leniency on cash buffers
* Impact of wider economy remit for FPC eyed
By Huw Jones
LONDON, June 22 The Bank of England's risk
watchdog looks set to allow lenders next week to free up
billions of pounds from their cash buffers and help haul the
economy out of recession.
The Financial Policy Committee (FPC) meets on Friday and
publishes recommendations for regulatory action on June 29. Some
members have dropped heavy hints on what to expect as part of a
wider UK effort to get more credit flowing into companies.
The FPC, chaired by BoE Governor Mervyn King, is tasked with
spotting broad risks such as asset bubbles that could
destabilise the financial system. It plugs a pre-crisis
supervisory gap and advises on action regulators should take.
King said last week "the need for banks to hold large liquid
asset buffers is much diminished, and I hope regulators around
the world will take note".
His deputy, Paul Tucker, also an FPC member, said regulators
should see whether they can liberate this part of banks' balance
sheet in these stressed times.
Tucker also said requiring hefty buffers stops the economy
from getting the full benefit of the Bank's 325 billion pound
quantitative easing programme of UK government bond purchases.
The buffers ensure banks have enough funding if markets
suddenly dried up, an event which forced Britain to nationalise
Northern Rock bank in the 2007-09 crisis.
"Excessive liquidity requirements have a negative impact on
the ability and willingness of banks to expand their balance
sheets," said Michael Lever, managing director at banking-lobby
Association for Financial Markets in Europe (AFME).
"So if they were partially relaxed, then it would give banks
increased flexibility to support lending and economic recovery,"
The sums freed could be huge as Barclays alone held
170 billion pounds of liquidity - as opposed to separate capital
buffers - in the first quarter.
An industry official estimates the big four banks combined,
the others are HSBC, Lloyds and Royal Bank of
Scotland, hold 650 to 700 billion pounds in liquidity.
A rowback of 20-30 percent, the magnitude experts say would
have an impact, would release 150-200 billion pounds for use
though bankers warn privately there is no guarantee freed up
cash would end up in the pockets of credit-starved companies.
In particular small firms have long complained about the
difficulty to get credit and BoE monetary policymaker Martin
Weale warned on Thursday that the high effective interest rates
and credit rationing were factors depressing the economy.
Britain was the first to force lenders to build up liquidity
buffers, well ahead of global rules that don't start until 2015,
thereby giving UK regulators wiggle room.
An easing of banks' buffers would dovetail with a wider UK
initiative announced by King and Osborne last week to spur the
flow of credit.
The FPC has been set up on an interim basis but will have
formal powers from next year to order regulators to take action
such as forcing banks to hold more capital.
The regulatory shift comes as finance minister George
Osborne plans to widen the FPC's remit to include a "secondary
objective" of supporting economic policy.
The existing remit is to promote financial stability without
harming the economy but bankers say the wider remit to actively
help the economy will give the FPC second thoughts on taking
Simon Hills of the British Bankers' Association welcomed the
BoE's decision this week to give banks 5 billion pounds of
low-interest six-month loans as a flavour of what's to come.
"It is the first tangible evidence the Bank is responding to
the FPC's mandate to include economic growth in the factors it
considers," Hills said.
The FPC has been split for a year over whether it should
help the economy by using its so-called macroprudential tools to
lower bank capital and liquidity levels.
Britain's return to recession and heightened euro zone debt
crisis appears to have settled the debate.
FPC member and Financial Services Authority Chairman Adair
Turner, likens it to pouring a tot of alcohol into the punchbowl
to get the party going again but concedes this may be "pushing
on a string", meaning difficult to do in practice.
Etay Katz, a financial lawyer at Allen & Overy in London,
said widening the FPC's remit to touch on monetary policy would
be undesirable and create a conflicting agenda.