Bank could relax liquidity rules

The Bank of England is expected to launch the latest plank in its strategy to kickstart lending next week with a move to free up billions of pounds held by banks.

Experts believe the Bank's Financial Policy Committee (FPC) will recommend plans next Friday to relax rules requiring banks to hold large amounts of cash as a buffer.

Members of the committee, which oversees financial stability, have already signalled the move as the Bank looks at ways to get the flow of credit moving.

It would be the next step in the Bank's battle to ward off a tightening credit squeeze, following the announcement last week of a £100 billion-plus scheme to boost bank lending.

The Bank revealed it was working on a new "funding for lending" scheme, while this week it held its first £5 billion monthly auction under a six-month loan facility programme.

Bank governor Sir Mervyn King, who chairs the FPC, hinted on unveiling the schemes last week that the Bank may also look at relaxing liquidity rules.

He said: "In current exceptional conditions, where central banks stand ready to provide extraordinary amounts of liquidity, against a wide range of collateral, the need for banks to hold large liquid asset buffers is much diminished, and I hope regulators around the world will take note."

His deputy Paul Tucker - who is also on the FPC - has said regulators should look at freeing up hefty cash buffers.

It has long been argued that the increasing requirements for banks to keep cash by as a cushion is holding back aims to lend more to the economy. However, it is not thought the Bank is planning to relax capital reserve rules that protect banks in the event of financial stress.

Allowing banks to tap into their liquidity buffers would also allow them to make use of the cash boost offered under the £325 billion Quantitative Easing (QE) programme. The Bank is widely predicted to extend QE in the coming months as the eurozone crisis threatens to make credit more expensive for banks and as they seek to hoard cash.

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