SUCH is the concern of the Bank of England's financial watchdog about the state of the economy that it considered lifting rules on banks' cash holdings altogether.

Minutes from the Financial Policy Committee's latest meeting published yesterday show that members discussed the removal of rules on liquidity due to concern that it is hindering lending.

The discussion is remarkable given that low liquidity levels were contributors to the part-nationalisation of Royal Bank of Scotland and Halifax Bank of Scotland, now part of Lloyds Banking Group, in 2008.

Instead, it agreed to ask the Financial Services Authority to tell banks that they could draw on their liquid buffers in a crisis.

"Members considered whether there was a case for going further by recommending the suspension or easing of the current guidance," according to FPC minutes.

"Suspension might provide the clearest possible message to banks that they could reduce their liquid asset holdings.

"Given, however, the uncertainty about how far regulatory requirements were the key constraint, and recognising the benefits that had accrued from the regime over recent years, including in incentivising safer funding structures, this option did not command support in current circumstances."

The minutes showed that new schemes offering liquidity insurance to banks were key to its recommendation.

The minutes noted: "On pure microprudential grounds – viewing banks on an individual basis in isolation – the FSA would not choose to loosen the guidance applied to banks".

The FPC's Financial Stability Report, published last week, revealed that banks' holdings of liquid assets such as cash have tripled since 2008 and now account for 15% of total assets.

But they have remained untouched despite rising funding costs caused in part by the eurozone crisis and lacklustre economic growth.

The FPC's minutes reported that members, who include the Bank Governor Sir Mervyn King and FSA chairman Lord Adair Turner, discussed various ways of the FSA implementing the policy but left it up to the regulator.

The FPC remains worried about the eurozone crisis.

The Committee judged that the overall capitalisation of the banking system was unlikely to be sufficient for stability to be assured, the minutes noted.