* BoE's FPC says financial system remains fragile
* FPC asks for power to order banks to raise capital buffers
* Body not yet looking to control UK mortgage market
By David Milliken and Huw Jones
LONDON, March 23 British banks need to raise new
capital as soon as they can, because the global financial system
remains fragile despite action by the European Central Bank to
shore up the euro zone, the Bank of England's new risk watchdog
said on Friday.
The BoE's Financial Policy Committee (FPC) said banks had
gone as far as they could to raise capital by keeping down pay
and dividends, and called on the government to give it powers to
force banks to raise capital if they resisted.
But the FPC stopped short of asking for the right to
intervene directly in the market for home loans, wary of
sparking a political backlash if it made house purchases harder.
From next year the body will become Britain's top financial
supervisor, as part of a far-reaching change to British bank
regulation in the wake of the financial crisis. It is one of a
new breed of watchdogs springing up across the world to spot
risks that go beyond a single bank, plugging a gap in previous
supervision that focused on misconduct by individual lenders.
The FPC - echoing previous comments from the central bank -
said financial market tensions had eased after the European
Central Bank pumped a trillion euros into European banks since
the FPC's last meeting in December.
This has helped British banks to raise long-term debt
finance and revived their share prices by one third, and it was
now cheaper to insure against them failing to pay back their
"The committee agreed, however, that conditions remained
fragile," the BoE said. "Questions remained about the
indebtedness and competitiveness of some European countries.
Banks with large exposures to those countries ... should be
particularly alert to the need to build capital," it said.
Previously, the FPC had advised banks to increase their
capital buffers against future shocks on an opportunistic basis,
in part by keeping down pay and dividend payments. But this
approach had gone as far as it could, and banks now needed to
take more resolute action as early as was feasible.
The British Bankers' Association said calls for higher
capital needed to be balanced against the need to help economic
growth and that UK lenders have "already restructured and raised
additional capital and are well on the way to meeting Basel III
HSBC, Barclays, Lloyds and RBS
already hold core capital levels of about 10 percent or
more, well above the 7 percent minimum set by Basel III, the
international accord on safety buffers for banks.
Currently the FPC only has powers to recommend banks take
action, but from next year it will be able to give them orders.
Britain's finance ministry had asked the FPC to set out the
powers it wants, and on Friday it set out three - a smaller
initial number than some analysts had expected.
Most strikingly, it said it would be premature to have the
power to set minimum income or deposit requirements for
borrowers in Britain's mortgage market.
The committee said it "did not perceive the public debate
necessary to achieve acceptability for such instruments to be
sufficiently advanced at present" and industry analysts said the
FPC appeared keen not to overplay its hand.
"The fact they have not been quite as greedy for powers as
one might expect is probably connected to reservations shown by
parliament's Treasury Select Committee, where there was clearly
uneasiness about the extent to which FPC powers might infringe
on the political domain," said Michael McKee, a partner at law
firm DLA Piper.
In response to the proposals, Treasury Committee chairman
Andrew Tyrie said the FPC's "lack of confidence" to intervene
directly in the mortgage market reinforced his long-standing
concern about the need to make the BoE more legitimate.
"It is so important that the Bank of England's
accountability to Parliament is put in good shape. If that can
be done, the Bank will find it much easier to get public
acceptance for their decisions," he said.
However, the FPC will still have powers to intervene in the
mortgage market indirectly. It could recommend that other
regulators look more closely at lenders it believed were acting
imprudently, and also called for powers to raise capital
requirements on lending categories it believes are more risky -
potentially including high loan-to-value mortgages.
These so-called 'sectoral capital requirements' potentially
give the BoE wide-reaching powers to shape the flow of lending
around the British economy, giving incentives to areas it
believes are desirable - for example, business lending - while
restricting credit elsewhere, like in commercial real estate.
The FPC also wants to be able to vary the limit on banks'
leverage ratio - the maximum multiple of assets that they are
able to lend - and employ 'counter-cyclical capital buffers'.
By raising capital requirements across the board in a boom,
the FPC would in theory discourage risky lending, and leave
banks more protected when a bubble burst. Conversely, these
fatter capital buffers built up in a boom could be drawn down on
in a slump to get credit growing faster.