The Bank of England said today in its Financial Stability Report that banks should make the most of strong profits and relatively stable financial markets to bolster their weakened balance sheets and protect themselves against any future worsening in macroeconomic conditions.
"Despite inevitable short-term costs, there is a strong case for banks acting now to improve balance sheet positions while conditions are favorable," the BofE said.
It added that it was also a good time for banks to raise external capital, reduce leverage, lengthen funding maturities, and come up with plans to help deal with the withdrawal of public support.
"Given their balance sheet vulnerabilities, banks remain exposed to any future deterioration in macroeconomic and market conditions, which could substantially raise the cost of funding and capital raising in the future," the central bank warned.
The BofE said that a revival in securitization markets would be key in helping banks to improve the maturity profile of their borrowing, and described reopening securitization markets, with a more robust contractual structure, as "a priority."
It also said that a simplification of banks' capital structures — possibly through the greater use of contingent capital instruments — was "desirable."