The interim Financial Policy Committee unanimously agreed the following policy recommendations:
1. The Committee recommends that, 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. That 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, including via the planned ‘funding for lending’ scheme. Banks should continue to restrain cash dividends and compensation in order to maximise the ability to build equity through retained earnings.
2. In addition, the Committee reiterates its recommendation to the FSA to encourage banks to improve the resilience of their balance sheets, including through prudent valuations, without exacerbating market fragility or reducing lending to the real economy.
3. The Committee recommends that banks work to assess, manage and mitigate specific risks to their balance sheets stemming from current and future potential stress in the euro area.
4. The Committee recommends 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. The ability to do so is enhanced by additional contingent liquidity made available to banks by the Bank. The Committee also recommends that the FSA considers whether adjustments to microprudential liquidity guidance are appropriate, taking some account of this additional liquidity insurance.
5. The Committee recommends that UK banks work with the FSA and British Bankers’ Association (BBA) to ensure greater consistency and comparability of their Pillar 3 disclosures, including reconciliation of accounting and regulatory measures of capital, beginning with the accounts for the current year.