Banks face hoarding more capital

Lord Turner believes higher capital ratios will reduce economic instability

Britain's banks may be forced to stockpile extra capital so they can weather future economic downturns.

Financial Services Authority chairman Lord Turner said in a speech in New York that he believed higher capital ratios were "a possible way forward".

He said the move would increase the cost of banking but "deliver the benefit of reduced instability".

The FT reported the government may set out the measure when announcing new rules for Britain's banks next month.

Financial cushion

Lord Turner was speaking at a Global Financial Forum in New York.

He first suggested the idea in March in a report outlining possible changes to the banking system.

It said banks would be required to build up reserves in healthier economic times as a cushion against future losses.

They would also be forced to hold more cash or liquid investments, to make them less vulnerable if other sources of finance dry up.

The Financial Times reported that the chancellor was expected to announce next month that the UK's biggest banks could be forced to hold more capital than the sector average.

The paper said the move would acknowledge that some banks were too big to be allowed to fail, and the higher capital ratios were the price they must pay for the implicit reliance on a taxpayer bail-out if they run into trouble.