The Bank of England's Financial Policy Committee has called on banks to raise more capital to increase their resilience in a fragile financial environment.
Minutes published on Friday from the committee's meeting earlier this month reveal that, while banks had made 'some progress' in building capital levels since its previous meeting in November 2011, more needed to be done.
'The committee remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks and noted that the ability to make further progress via greater restraint of cash distributions was limited,' they said. 'It therefore advised banks to raise external capital as early as feasible.'
The committee, which is chaired by Bank of England governor Mervyn King, currently exists in an interim form, but is set to be created as a statutory body later this year. It's monitoring role means it can pass on concerns about any economic risks it identifies to the Prudential Regulation Committee being established as part of the new 'twin peaks' system of financial regulation.
In the minutes from this month's meeting, the FPC also outlined the statutory powers it expects to be given in order to meet the systemic risks arising from excessive balance sheet leverage and fragile funding positions, excessively loose terms and conditions of lending and fragilities in market structures.
In particular, it called for control over the setting of the countercyclical capital bugger in the UK, sectoral capital requirements and a leverage ratio. These tools, the committee said, would 'provide control most directly over the balance sheets of a range of financial institutions'.
Speaking on Friday, FPC member Michael Cohrs said these tools were needed if the Bank was to do something 'meaningful' when it next determines 'systemic risk building dangerously within the financial system'
They were also needed if it wants to 'allow financial institutions in bad times to utilise a countercyclical capital buffer built up in good times'.
He told an event in Edinburgh that the move to a new system of financial regulation since the economic crisis was likely to be an improvement.
But, he added: 'We shouldn't be under any illusion that a change in the structure of regulation in itself will rule out another financial crisis or indeed that this new system will prevent the collapse of individual banks or other financial services companies.
'Ultimately it is the culture within individual banks and the incentive systems that drive risk taking which need to be changed. The good news is that I see evidence that banks are changing incentive systems and this will lead to a different culture within the banks which society will prefer.'
Mr Cohrs said, however, that he did not want to see any end to risk-taking. 'Care must be taken to ensure that regulators don't go too far and stifle legitimate risk taking which creates value in the real economy.
'The wisdom of hindsight, from which we benefit in considering the 'light-touch' approach, will not be available to us to evaluate the post-crash regulatory mantra of "intensive and intrusive" for some time yet. But even at this early stage it seems clear that the correct balance needs to be struck.'
