Bank of England says banks should cut bonuses before lending

LONDON: Britain's banks should cut bonuses and shareholder dividends to build up cash reserves, instead of choking off lending to consumers, the Bank of England's new watchdog said on Wednesday.

The central bank's Financial Policy Committee (FPC) said in minutes from its latest meeting that lenders should lower their "discretionary distributions" -- like staff bonuses and shareholder dividends -- in times of falling profits.

The FPC, set up to oversee financial stability in the wake of the credit crunch and global financial crisis, had already recommended in June that banks retain more of their profits earned during the good times to weather adverse shocks.

Minutes from FPC's second meeting held on September 20 said: "The Committee ... recommended that banks should take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy.

"This could include raising long-term funding whenever possible and ensuring that discretionary distributions reflected any reduction in profits."

The Committee added that fears about exposure to debt-ravaged eurozone nations had made it more difficult for banks to preserve cash without choking off lending to households and businesses.

"Since its previous meeting, there had been severe strains in financial markets, which stemmed in large part from continuing concerns about the sustainability of external and internal debt positions of some countries, especially in the euro area," the FPC said on Wednesday.

"Anxiety about the consequences of these issues for banks had increased materially and, in turn, the perceived vulnerabilities of banks were adding to strains in financial markets."

Copyright AFP (Agence France-Presse), 2011