Britain's banks need to shore up their finances against possible shocks from the break-up of the eurozone and a slowdown in global economic growth, a new Bank of England financial watchdog warned on Monday.
The financial policy Committee (FPC) said the outlook for the banking sector remained difficult and institutions needed to bolster their capital reserves to cushion against a possible downturn.
The warning will disappoint the Treasury, which is keen for banks to increase their mortgage lending and loans to small businesses.
Vince Cable said on Monday he will start a £1bn government-owned investment bank to increase the amount of funds available for lending to counter restrictions on the banks, but admitted it is unlikely to be running before 2014.
The government hopes its backing will be matched by a similar amount from private capital and could support up to £10bn of new and additional lending, the business secretaryannounced.
The FPC said on Monday that financial stability had not altered since June. Three months ago, it said that banks could temporarily run down some of the short-term cash set aside for future market shocks in a bid to stimulate lending and growth in the economy, but also recommended that banks should restrain payouts to shareholders and bonuses so they can build up cash reserves.
Threadneedle Street is worried that UK banks are still sitting on huge losses from loans to businesses and mortgage holders dating back to the Lehmans crash that have yet to be fully written down on their balance sheets.
The FPC, which will publish minutes of its September meeting on Thursday, was formed as part of a wider shakeup of the UK regulatory system and is currently operating in an interim capacity.
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