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24 June 2011
Last updated at 06:13 ET
The Bank of England's new financial policy committee (FPC) has called for an audit of UK banks' exposure to the eurozone debt crisis.
The Bank's governor Sir Mervyn King said the debt problems of Greece and other countries posed "the most serious and immediate risk" to UK banks.
The FPC also called for banks to divert their profits towards building up their reserves against future losses.
It would mean the banks paying out less in dividends or bonuses.
UK lenders need to build up their capital buffers as part of the Basel III international agreement, which was designed to ensure that all banks worldwide are better able to withstand another financial crisis.
Sir Mervyn said that by paying out less of their profits to shareholders and employees, the banks could rebuild their capital without having to cut back on lending.
In the conclusions of its first meeting, the committee asked the soon-to-be-replaced Financial Services Authority to ensure that the banks it supervises comply with the recommendation.
Tangled web Regarding the eurozone, the Bank governor said that while UK banks may not have lent very much directly to Greece and other troubled economies, they were still at risk of financial contagion.
"The direct exposures of UK banks to Greece are really remarkably small," he said in response to a question at the press conference.
But he said that British banks may be exposed to other lenders who may get into trouble if they were to suffer big losses on their loans to distressed eurozone countries.
The FPC said that all banks, big and small, should be permanently required to report more thoroughly their exposures to different countries.
"There is always uncertainty about the scale of exposures, which counter-parties out there are the ones which are heavily exposed," he explained.
He said this can lead to a crisis of confidence in the banks, because lenders cannot untangle the web of risk exposures involved.
"We can't hope to prevent financial crises from happening, but we can build institutions that help to ensure that our financial system is more resilient in the future," Sir Mervyn said.
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The Bank's governor Sir Mervyn King said the debt problems of Greece and other countries posed "the most serious and immediate risk" to UK banks.
The FPC also called for banks to divert their profits towards building up their reserves against future losses.
It would mean the banks paying out less in dividends or bonuses.
UK lenders need to build up their capital buffers as part of the Basel III international agreement, which was designed to ensure that all banks worldwide are better able to withstand another financial crisis.
Sir Mervyn said that by paying out less of their profits to shareholders and employees, the banks could rebuild their capital without having to cut back on lending.
In the conclusions of its first meeting, the committee asked the soon-to-be-replaced Financial Services Authority to ensure that the banks it supervises comply with the recommendation.
Tangled web Regarding the eurozone, the Bank governor said that while UK banks may not have lent very much directly to Greece and other troubled economies, they were still at risk of financial contagion.
"The direct exposures of UK banks to Greece are really remarkably small," he said in response to a question at the press conference.
But he said that British banks may be exposed to other lenders who may get into trouble if they were to suffer big losses on their loans to distressed eurozone countries.
The FPC said that all banks, big and small, should be permanently required to report more thoroughly their exposures to different countries.
"There is always uncertainty about the scale of exposures, which counter-parties out there are the ones which are heavily exposed," he explained.
He said this can lead to a crisis of confidence in the banks, because lenders cannot untangle the web of risk exposures involved.
"We can't hope to prevent financial crises from happening, but we can build institutions that help to ensure that our financial system is more resilient in the future," Sir Mervyn said.
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