Bank of England urges banks to strengthen reserves

The Bank of England\'s financial policy committee says banks must raise capital to withstand the downturn, particularly that caused by eurozone debt problems.

The governor of the Bank of England, Sir Mervyn King, said they needed to build up their capital buffers further to protect against an \"exceptionally threatening\" environment.

He also said this could involve raising capital by issuing new shares.

He also said banks should keep lending, but should cut dividends and bonuses.

The committee said the eurozone debt crisis remained the biggest threat to the UK\'s banking system.

On Wednesday, six central banks, including the Bank of England, took action to encourage lending between banks in order to keep the economy moving.

Sir Mervyn told a news conference that the Bank was making \"contingency plans\" in case of a break-up of the eurozone, although he said that he would not go into any details as to what these were.

He added that the UK\'s banks were among the strongest in the world, with tier 1 capital ratios - an internationally respected measure of a bank\'s strength - at well above 12%.

That is higher than they were before the credit crisis began in 2008.

Some bankers argue that tighter capital requirement rules mean lower lending, as banks are forced to hang on to assets as a contingency, rather than pass it on to borrowers.

The chief executive of Royal Bank of Scotland, now part-owned by the UK government, said recently that strict regulation meant investors saw UK banks as a \"dumb\" place to invest, and that it limited their ability to lend.

Earlier this week, Sir Mervyn told a committee of MPs that tighter capital rules did not constrain bank lending.

The financial policy committee (FPC) is chaired by Sir Mervyn, and at present only has an advisory role.

Once the legal framework is in place, it is expected to become the country\'s top financial regulator from the start of 2013


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