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Plans to kickstart lending
11:36am Tuesday 16th October 2012 in Business
BANKING rules have been relaxed to kickstart lending and help the UK on the path to economic recovery.
The Financial Services Authority (FSA) has made crucial changes to rules designed to ensure banks have adequate balance sheet strength in an attempt to allow greater flexibility in lending to households and businesses.
Banks now do not have to hold extra capital against new loans made under the £80bn Funding for Lending scheme launched by the Treasury and Bank of England. Capital and liquidity rules have also been tweaked as part of a concerted push to get banks lending freely again as Britain’s economy is hampered by poor credit availability.
The FSA said it will no longer require banks to maintain core capital ratios of ten per cent of their assets, instead setting numerical targets for each bank, meaning they cannot cut back on lending to boost balance sheets.
Banks have also been told they can hold a broader variety of assets in capital buffers – in place to ensure a bank is able to withstand market shocks or a run by depositors.
The Bank and Treasury launched the Funding for Lending initiative offering banks funding at cheap interest rates over a four-year period in return for increased lending. The FSA also eased rules allowing banks to tap into their so-called liquidity buffers to keep up the flow of lending. There had been concerns that banks were hoarding cash to meet capital rules and harming the economy by lending too little as a result.
The move sees the UK lead the way on a pioneering global strategy to use bank regulation as an economic tool.
But regulators will have to strike a balance in relaxing rules while ensuring banks are strong enough in the face of headwinds in the eurozone and wider global economy.