Bank of England Asked for Clarity on Their Advice

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The Bank of England’s Financial Policy Committee (FPC) have gathered today in order to discuss what needs to be done by the UK’s financial services industry to bring them through the current financial situation. Previously, the FPC have said that banks need to raise capital in order to weather any impending failures in markets or fines that might be laid upon them. However, the banks currently have as much capital as the regulations demand, and so are asking what more they are supposed to do and why the Bank is making these suggestions but not enshrining them in the regulation itself.

The meeting today is expected to answer those questions, but it won’t be until next Wednesday that the decisions made today are actually announced, such is the way the Bank of England operates. Whilst banks will appreciate any clear guidance that they get on capital, they may not be so happy about the situation they face if they actually try to raise the money.

Currently, banks are having a hard time shifting shares in their companies as investors feel that the ongoing changes in regulation and the almost never-ending flow of bad news surrounding the industry is damaging their chances of getting a decent return on their investment. Shares are the best way for banks to raise capital, as other methods, such as making and keeping a profit by investing savers’ money, are over a longer term and don’t produce the scale of money required quickly enough.

The other option that would be possible is that the government buys up shares in the banks, essentially creating a loan from the state to the banks similar to the bailout that was performed in 2009, but with the chancellor currently wanting to offload the government’s shares in banks, this seems an unlikely course.

UBS have summed up the situation concisely and give a very clear idea of what the banks want from the FPC’s next statement: “If the FPC wants new equity in the UK banks, we believe it is incumbent upon it to make clear its reasons why, how much should be injected, which sort of instrument and by when this should be completed.”