Banks get relaxed rules for capital

Banking rules have been relaxed to kick-start lending and help the UK on the path to economic recovery.

The Financial Services Authority (FSA) confirmed it has made crucial changes to rules designed to ensure banks have adequate balance sheet strength in an attempt to allow greater flexibility in lending to households and businesses.

Banks have been told they do not have to hold extra capital against new loans made under the £80 billion Funding for Lending scheme launched recently by the Treasury and Bank of England.

Capital and liquidity rules have also been tweaked as part of a concerted push to get banks lending freely again as Britain's economy is hampered by poor credit availability.

Blue-chip bank shares rose after news of the rule changes emerged, with part-nationalised Lloyds Banking Group up more than 3%, fellow state-backed player Royal Bank of Scotland up 2% and Barclays and HSBC also making gains.

The FSA said it will no longer require banks to maintain core capital ratios of 10% of their assets, instead setting numerical targets for each bank that will mean they cannot cut back on lending to boost their balance sheet.

Banks have also been told that they can hold a broader variety of assets in their capital buffers which are in place to ensure a bank is able to withstand market shocks or a run by depositors.

The changes come after the Bank and Treasury launched their Funding for Lending initiative offering banks funding at cheap interest rates over a four-year period in return for increasing lending.

The FSA also recently eased rules allowing banks to tap into their so-called liquidity buffers to keep up the flow of lending. There had been concerns that banks were hoarding cash to meet capital rules and harming the economy by lending too little as a result.

The move sees the UK lead the way on a pioneering global strategy to use bank regulation as an economic tool.