The interim Financial Policy Committee issued the biannual Financial Stability Report today. The Report made three policy recommendations.

First, it recommended that banks act to increase further levels of capital, including through limiting distributions via dividends or bonuses or raising external capital if earnings are insufficient. As BoE Governor Mervyn King noted in the accompanying press conference, the committee does not consider UK banks to be under-capitalised, but that building up additional capital would be a wise precaution in the context of the uncertain financial environment.
 
Second, the committee reiterated its advice to the FSA to encourage banks to avoid exacerbating market fragility or reducing credit flows to the real economy as they seek to strengthen their balance sheets. We think the committee is clearly concerned that banks will not maintain adequate credit flows, particularly as higher funding costs threaten to drive up lending rates and banks are under pressure to increase capital levels.

Finally, there was a recommendation to the FSA to encourage banks to disclose leverage ratios by no later than the start of 2013.
 
The Report includes a couple of other notable features. First, it is explicit in outlining the heightened risks to the UK financial system from events in the euro area, noting that "the outlook for financial stability has deteriorated materially since June" and highlighting the potential for indirect exposure for the UK despite direct exposure being fairly limited. Second, it provides a formal endorsement by the committee of the final report of the Independent Commission on Banking, noting that the stability benefits of implementing the recommendations are likely to "exceed by far any costs". The record of the committee's 23 November meeting will be published on 6 December.
 


source: BarCap