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Bank of England to relax liquidity requirements
29 August 2013
Move to free up £90bn for lending and investment
bank of England
Financial Policy Committee
UK banks will be allowed to operate with lower liquid asset holdings, the Bank of England has confirmed. Mark Carney, governor of the Bank of England, has confirmed that banks meeting the minimum 7% capital threshold for reserves will be allowed to lower their holdings in liquid assets.
The move was recommended by the Financial Policy Committee (FPC) in June.
He said: “For major banks and building societies meeting the minimum 7% capital threshold, the Bank of England will reduce the level of required liquid asset holdings. The effect will be to lower total required holdings by £90 billion, once all eight major banks and building societies meet the capital threshold.
That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy.”
As a result of the financial crisis, UK banks were required to build up significant liquidity buffers, however, the FPC concluded there was scope to reduce these holdings.
The UK's Prudential Regulation Authority (PRA) has detailed how it will implement the FPC's recommendation, amending its current liquidity framework to demand firms hold “highly liquid assets” equivalent to 80% of the Basel Committee's ‘Liquidity Coverage Ratio’ - sufficient liquid assets to cover expected net cash outflows under a 30-day liquidity stress scenario.
Should all eight major UK banks meet the PRA's 7% core equity capital standard, the PRA estimated this would free up around £90bn “to support lending to the real economy”.
The PRA said it would release further details of how it would implement the EU and Basel Committee's requirements – which are still being finalised – in due course.