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London - The eurozone's debt crisis poses the biggest threat
to Britain's financial stability and banks must come clean on their full
exposure, Britain's new risk watchdog said on Friday.
The Financial Policy Committee (FPC), which is operating in an
interim capacity until legislation is passed next year, also turned up the heat
on banks to use strong profits to boost capital cushions.
However, it stopped short of placing curbs on profit payouts
to shareholders as US authorities have done.
"It does not make sense to place an arbitrary
limit," Bank of England governor and FPC chairperson Mervyn King told a news
conference. "What matters is to put in the capital."
Bank share prices showed little reaction to the report,
holding onto gains made after Greece won the consent of international lenders
for a five-year austerity plan to avoid bankruptcy.
King said a roadmap was still needed to show markets there
was a way out of the Greek crisis, and the watchdog's report focused heavily
on the risks posed by high-indebted eurozone states.
"Sovereign and banking strains are the most material
and immediate threat," it said.
"Market concerns remain over fiscal positions in a
number of euro area countries and the potential for contagion to banking systems."
King warned that opaque instruments, such as exchange-traded
funds (ETFs), needed closer scrutiny.
Hector Sants, chief executive of the Financial Services
Authority and a member of the new watchdog, said he would ask European
regulators if the rules on ETFs needed to be tightened.
Sants questioned whether so-called synthetic
ETFs were appropriate for retail customers.
The watchdog's key recommendations include:
- Improved disclosure of sovereign and banking sector debt
exposure by major banks on a permanent basis;
- Requiring smaller banks, not part of current EU stress
tests, to compile data on sovereign and banking debt exposure;
- Ensuring banks use strong profits to build up capital
cushions before new Basel III rules come in;
- Asking the Financial Services Authority to report back to
the committee by the fourth quarter on whether banks are adequately building up
capital buffers;
- Better monitoring of opaque funding structures such as
collateral swaps or similar transactions used by ETFs;
- Improved data from banks on forebearance in the household and
corporate sector.
