The Financial Policy Committee, which is operating in an interim capacity until legislation is passed next year, also turned up the heat on banks to use strong profits to boost capital cushions.
Bank of England Governor and FPC Chairman Mervyn King said a roadmap was still needed to show markets there was a way out of the Greek debt crisis, and the watchdog’s report focused heavily on the risks posed by high-indebted euro zone states.
“Sovereign and banking strains are the most material and immediate threat,” it said.
“Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems.”
Greece won the consent of international lenders on Thursday for a five-year austerity plan to avoid bankruptcy, which helped reassure financial markets.
The FPC report stopped short of placing curbs on bank payouts to shareholders as US authorities have done.
“It does not make sense to place an arbitrary limit,” King told a news conference. “What matters is to put in the capital.”
The FPC is one of a new breed of watchdogs set up after the financial crisis to try to spot trouble in the financial system before it can derail the wider economy.
The US and Europe have similar bodies that are also finding their way in the new regulatory landscape.
“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,” King said.
King warned that opaque instruments, such as exchange traded funds, needed closer scrutiny.
Hector Sants, chief executive of the Financial Services Authority and a member of the new watchdog, said he would ask European regulators if the rules on exchange traded funds needed to be tightened.
Sants questioned whether so-called “synthetic ETFs” were appropriate for retail customers.
Improved disclosure of sovereign and banking sector debt exposure by major banks on a permanent basis;
Requiring smaller banks, not part of current EU stress
tests, to compile data on sovereign and banking debt exposure;
Ensuring banks use strong profits to build up capital cushions before new Basel III rules come in;
Asking the Financial Services Authority to report back to the committee by the fourth quarter on whether banks are adequately building up capital buffers;
Better monitoring of opaque funding structures such as collateral swaps or similar transactions used by exchange-traded funds;
Improved data from banks on forebearance in household and corporate sector
