Bank of England Governor Mervyn King on Friday urged British banks to build temporary cash buffers to ensure continuous lending to the real economy. Banks are free to use their regulatory liquid asset buffers in the event of a liquidity stress, the central bank's Financial Policy Committee (FPC) said.
Releasing the central bank's Financial Stability Report, King said "taking into account each institution's risk profile, the Financial Services Authority (FSA) works with banks to ensure they build a sufficient cushion of loss-absorbing capital in order to help to protect against the currently heightened risk of losses."
He said this cushion may temporarily be above that implied by the official transition path to Basel III standards and would support additional lending to the real economy.
Raising capital can increase banks' capacity to lend and, if used to build a bigger cushion, can reduce the cost of debt funding, King said.
FPC recommended that the "FSA makes clearer to banks that they are free to use their regulatory liquid asset buffers in the event of a liquidity stress."
King observed that the outlook for financial stability has deteriorated, mainly due to uncertainties around euro area economic conditions. This has been reflected in higher funding costs for banks and higher interest rates for household and corporate borrowers in the UK, the policymaker said.
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