UK warns banks on eurozone debt threat

2011-06-24 12:43

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.