Bank of England warns credit institutions to prepare for future shocks on the financial markets and advised them to limit their balance sheets by reducing their staff and temporary suspend the payments of dividends to shareholders and use capital reserves to maintain liquidity in the economy, reports The Telegraph. British central bank analysts consider that there is a need for “short-term measures” to prevent repetition of the credit crisis of 2007.
The institution recommended banks to strengthen their capital and the stock of liquid assets in order to “absorb future shocks without credit squeeze towards the economy”. Two ways to strengthen banks’ capital would be raising long-term funding from the markets and the reduction of dividends and bonuses given to shareholders in proportion to the decrease in profits.
Also, Bank of England believes that English authority for financial services (FSA) has a duty to encourage banks to manage their balance sheets in a manner “not to worsen the fragility of the markets”. “For example, currently, some measures taken to increase capital or liquidity rates could worsen response times (in the communication process) between the financial sector and economy and should be avoided”, notes the institution.
Bank of England has estimated in its report last year about the financial stability that the credit institutions could save approximately 11.5 billion euros a year by reducing employee benefits and limit dividend payments to shareholders. Last year, British banks paid 7.7 billion euros in bankers’ bonuses, 8% less than in 2009.
According to the quarterly study conducted by the Bank of England on credit conditions in the economy, banks warn that the poor state of financial markets could restrict lending in coming months. The same study showed that total loans to households increased slightly, and business lending remained at the same level in the third quarter of this year.