Bank of England and the UK Government: Ensuring Banks’ Survival

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In order to facilitate economic recovery, the Bank of England (BoE) and the UK government have proposed that major commercial banks should raise some extra £25 billion by December 31, 2013 (Wilson, 2013).

Issuing the statement on March 2013, the Financial Policy Committee in BoE pointed out that, some banks were at risk of losing about £50 billion in the next years based on bad loans and related fines. The treasury however indicated that taxpayers would not be required to spend more money on state-backed lenders, thus meaning that the banks would need to find ways of raising the required money independently (Wilson, 2013).

Explaining that the recovery of the UK economy requires strong banks, BoE underscored the importance of the financial institutions to self-repair by strengthening their balance sheets. In a 2012 report, BoE had stated that the authorities (i.e. the government), may provide temporarily funding to banks that are required to recapitalise and cannot access market funding immediately.

Where granted, the funding will enable banks meet their liquidity needs in the short-term (Federal Deposit Insurance Corporation & Bank of England, 2012). To access such funding however, the banks would need to secure it with collateral.

BoE has advised the UK banks to: restructure (and shrink the size of investment banking activities); cut the bonuses awarded to employees; and reduce bonuses paid to investors in order to meet the £25 billion shortfall.

Combined, all the three approaches suggested by Wilson (2013) will bolster the banks’ capital reserves, although some analysts have predicted some short-term consequences are inevitable. One such consequence has been identified as the threat of losing competent staff to firms that are willing to compensate them more favourably (Wilson, 2013)

Although not a requirement by either BoE or the UK government, it is argued that the £25 billion recapitalisation will eventually affect banks’ capacity to lend.

In order to facilitate economic recovery, the United Kingdom government and the Bank of England (BoE) have proposed that commercial banks solidify their capital base by £25bn by end of year (2013).

As far back as September 2012, the Financial Policy Committee (FPC) stated there was a need for banks to raise more capital externally instead of simply relying on the reduction of bonuses and dividends (Aldrick, 2012).

The major requirements to the banks are:

Recapitalise and strengthen balance sheets before the end of 2013
Raise the needed capital independently without involving taxpayers
Seek temporarily funding from the government if unable to raise the required capital immediately (or within the stipulated time)
Have collateral to secure the temporary funds sought from UK authorities

BoE has also suggested some ways through which the banks can raise (part) of the capital requirements internally. They include:

Shrinking investments for purposes of retaining financial liquidity
Cut back on bonuses given to bank employees and managers
Reduce dividend payments to investors (at least in the short-term) (Wilson, 2013)

The requirements by BoE and the UK government are meant to ensure that the banks survive the next three years (up to and including 2015) without jeopardising the savings of their customers.

In 2012, the Federal Deposit Insurance Corporation and Bank of England (2012) released a report documenting some of the measures that the regulators would take to ensure that consumers were not exposed to systemic risks by banks. One such measure was the requirement for banks to solidify their capital base by ensuring that their balance sheets were strong enough to withstand any negative shifts in the banks’ operating environment.

References

Federal Deposit Insurance Corporation & Bank of England. (2012). Resolving globally active, systematically important financial institutions. Web.

Wilson, H. (2013). British banks must shrink, cut bonuses, reduce dividends to meet 25bn shortfall. The Telegraph. Web.

Aldrick, P. (2012). Financial policy committee threatens to force banks into raising more capital. The Telegraph. Web.

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Bank of England and the UK Government: Ensuring Banks’ Survival

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