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Over the weekend there have been reports that UK banks are finding it difficult to comply with the Basel II capital requirements and balance these with the pressure from the UK government and industry associations to hold lending to industry to pre-crisis levels.
On Saturday, the Daily Telegraph reported that the UK Treasury was considering recommending changes to the Basel II capital requirements following a request from the UK banks’. The banks point out that increased lending requires extra regulatory capital. Just before Christmas, Stephen Green, chairman of HSBC, on behalf of a group of major British banks, sent a letter to the Chancellor, Alistair Darling, saying that Basel II requirements were preventing their ability to lend in the current climate. The Treasury is reported as accepting that something needs to be done, even if only temporarily, and that it agrees that the current situation is pro-cyclical, i.e. intensifying the down-turn, but has said that any change would need international agreement.
The Sunday Times reported that Prime Minister Gordon Brown was hosting a meeting of UK banking heads and Treasury officials to work on the details of further bank capital funding by the government. These measures will include government guarantees for industry lending and insurance for mortgages, as well as a “bad bank” which would take toxic debts off the banks’ books. All these actions would help banks reduce the capital requirements tied to lending and strengthen their balance sheets – guarantees and insurance would reduce the risk associated with these loans so reducing the risk-weighted capital figure and the corresponding regulatory capital requirements.
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