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BoE: Limit bonuses to boost bank capital

Wednesday 25 January 2012 – by Karina Whalley

Mervyn King - photo by Bank of England
The Bank of England says banks must limit dividends to shareholders and bonus payments to employees in order to boost capital so that they may continue lending.

Speaking in Brighton on Tuesday, the governor of the UK’s central bank Mervyn King said that the BoE stands ready to provide liquidity to healthy banks against good collateral should market conditions deteriorate.

King said: “We are also, through the bank’s new Financial Policy Committee, recommending to banks that they limit distributions to employees and shareholders, and instead build their capital in order to improve their resilience in an uncertain world while maintaining their lending to the real economy.

“There is no necessary contradiction between repairing balance sheets and continuing to lend. Every pound used to boost capital could support an extra twenty pounds of lending without increasing banks’ leverage.”

The 63-year-old BoE chief warned that 2012 was not going to be “an easy year”, despite some positive sentiment in financial markets and a fall in inflation in the UK.

“The banking sector was and remains at the centre of the debt overhang,” King said, adding that until the euro area problems are resolved, concerns about the scale of exposure for UK banks will force them to experience elevated funding costs.

The governor says that the world economy is moving to a new equilibrium while over-leveraged balance sheets will need to be corrected.

But the governor praised UK banks for having made “substantial progress” in rebuilding both their capital and liquidity since the 2008 financial crisis. He also said the BoE’s framework for lending to healthy banks in stressful periods has been “completely overhauled” since the beginning of the crisis.

In December, the UK central bank introduced a new auction of central bank money against wider collateral called the Extended Collateral Term Repo Facility.

The BoE also coordinated an expanded network of swap arrangements among the world’s major central banks.

“Starting from a position of excessively leveraged balance sheets, the path of recovery is likely to be arduous, long and uneven,” King said.

“The position of the world economy, especially in the euro area, is serious. But there is no reason to despair. All crises come to an end.”

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