UK banks gilt-buying spree may not materialise

By George Hay, breakingviews.com Published: 6:03PM GMT 08 March 2010

By their own standards, a little banks already have enough liquidity. Last August, Royal Bank of Scotland RBS.L pronounced it longed for to set up a aegis -- consisting of cash, gilts and high-quality corporate debt -- of 150 billion pounds by 2013. By the finish of 2009, the state-controlled bank had increasing the liquidity bonds to 145 billion, from 90 billion pounds a year earlier. Barclays, that increased the pot from 43 to 127 billion pounds in the same period, professes itself likewise confident with the reserves.

Last Oct the Financial Services Authority referred to that UK banks competence need a sum of 620 billion pounds of new liquid instruments. But that was usually if banks did not revoke their faith on short-term indiscriminate funding. In fact, lenders are timorous their change sheets and lengthening their debt maturities. The FSA reckons that if short-term appropriation needs tumble by twenty percent, banks competence usually need an one some-more 110 billion pounds.

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This is of some-more than educational interest. In the past year, the Bank of England has helped keep down payment yields low by spending the immeasurable infancy of the 200 billion bruise money-printing intrigue on gilts. That programme has right away been put on hold.

The UK supervision might have a get-out clause. Only around thirty billion pounds of RBS"s new 145 billion pounds aegis is essentially gilts. Much of the rest is high-quality corporate debt. The FSA has been pulling for the total aegis to be "safer" emperor debt.

But there are dual problems. First, the FSA can usually proviso in the new mandate when markets redeem -- and currently it judged that they hadn"t amply to begin tightening standards. Second, alternative European regulators do not determine on the regulator"s difficult line. The FSA could confirm to go it alone at the risk of commanding additional costs on the banks. If not, the supervision might need to see elsewhere to account the debt mountain.