With the eurozone in the midst of the worst crisis since its formation, the Bank’s interim Financial Policy Committee (FPC) said today banks should “give serious consideration” to raising external capital in the coming months.
The FPC warned that the risk from the eurozone remains “the most significant and immediate threat to UK financial stability”.
Bank governor Mervyn King said banks should consider raising capital by issuing new shares and urged them to cut dividends and bonuses to ensure they could keep lending to businesses and consumers.
In addition, King revealed that the Bank is making “contingency plans” in case the threatened break up of the eurozone does occur.
Speaking today, King said: “The crisis in the eurozone is one of solvency and not liquidity, and the interconnectedness of major banks means the banking systems and hence economies around the world are all affected.
“Only the governments directly involved can find a way out of the crisis. But here in the UK, we must try to bolster the resilience of our financial system better to withstand the storms that may come in our direction.”
The Bank’s warning comes after central banks around the world yesterday took action to increase liquidity in markets as a second credit crunch on the scale of 2008’s starts to take hold.
The Bank added the current market conditions were “exceptionally threatening”, and urged the FSA to take action to ensure banks increased capital levels.
“The Committee reiterates its advice to the FSA to encourage banks to improve the resilience of their balance sheets without exacerbating market fragility or reducing lending to the real economy,” the FPC said.
The FPC said banks should be forced to disclose their leverage ratios in regular reports – as decreed by Basel III legislation – by the start of 2013.
