The Financial Policy Committee has advised that the Financial Services Authority should monitor how banks manage their balance sheets.

The second meeting of the Financial Policy Committee, responsible for financial stability, was held on 20 September.

In a statement from that meeting, released today, the FPC said it had advised the FSA to encourage banks to manage their balance sheets in a way that “would not exacerbate market or economic fragility.”

The reason for this was that the FPC felt some actions taken to raise capital or liquidity ratios could worsen the feedback loop between the financial sector and the wider economy.

“Moreover, the Committee recognised that, in the event that severe risks crystallised, it would be natural for banks’ capital and liquidity ratios to be run down to ensure that lending to the non-financial economy was not impaired,” the FPC said.

It also discussed the need for  “short-term measures” to prevent another credit crunch.

Given the scale of current risks the committee felt it was necessary to discuss reducing the risk of any financial disruption.

The FPC said: “The Committee discussed the need for shorter-term measures to reduce the risk of a significant disruption to financial stability and so to the supply of credit of UK households and firms, which could feed back through the economy to increase the pressure on the financial system.”