BoE advises against capital levels cut

4 October 2011

The Financial Policy Committee (FPC) at the Bank of England (BoE) has advised against banks cutting liquidity and capital levels as a means of increasing credit supply.

While members are contemplating ways in which financial stability in the sector might be bolstered, the group said it would be inappropriate to target these sums.

The body noted market participants may view a reduction in ratios as an indication of weakness on behalf of lenders - especially at a time of such elevated risks.

In minutes taken from a recent meeting of the FPC at the BoE - which is sometimes referred to as the Old Lady of Threadneedle Street - it was observed industry figures "might interpret regulatory advice to cut buffers as a signal that banks were more fragile than previously had been thought".

The organisation explained this could lead to funding costs being raised - a move that may further impair the availability of credit.

By Asim Shah

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