| LONDON, July 17
LONDON, July 17 Britain's banks have been told
to test how they would cope if several euro zone countries
exited the single currency, the UK's Financial Services
Authority watchdog said on Tuesday.
FSA Chairman Adair Turner said Britain's banks needed to
think about problems arising from their assets and liabilities
being redenominated into another currency, even though the
likelihood of this happening was still small.
"We've certainly encouraged them to run those scenarios for
Greece, Spain, Italy, Portugal and Ireland," Turner told
parliament's Treasury Select Committee.
"I think we consider the chances very low, very very low for
at least some of those countries on that list, but I think it is
sensible to encourage people to run extreme risk scenarios,"
The committee was questioning Turner and Bank of England
(BoE) officials who are members of the BoE's Financial Policy
Committee which looks at risk affecting financial stability.
The FPC's meeting in June concluded that the euro zone debt
crisis was the biggest challenge facing the UK economy, which is
back in recession.
The committee agreed to help banks kick start the economy by
tapping billions of pounds from their cash buffers and using the
freed up money to increase lending to businesses.
The extent to which banks can cut their liquidity buffers --
mainly made up of government bonds -- will depend on how much
lenders have in collateral parked at the Bank of England.
"We are working through the details on that," Turner said,
adding the FSA will soon hold meetings with each bank over how
much they can tap their cash buffers.
"Within a few weeks we will have sorted this out," Turner
The FPC is still putting pressure on banks to build up their
separate capital cushions by retaining earnings, and curbing
bonuses and dividends, Turner said.
"Our banks are in a much stronger position than they were
three or four years ago," Turner said.
The FSA was discussing with some banks the possibility of
issuing contingent capital or CoCos, a hybrid debt that converts
to equity when a bank becomes stressed, Turner added.