16 March 2012

Bank of England: Financial Policy Committee (FPC) statement from its policy meeting, 16 March 2012

The FPC discussed its advice to HM Treasury regarding the macro-prudential tools over which the statutory FPC should have powers to Direct action by the Prudential Regulation Authority and the Financial Conduct Authority. The Committee also considered the outlook for financial stability.

Macroprudential policy tools: powers of Direction

The interim FPC agreed to advise HM Treasury that, in order to meet its proposed objective, the statutory FPC should initially have powers of Direction over the following tools:

• the countercyclical capital buffer;
• sectoral capital requirements; and
• a leverage ratio.

In addition to banks, the range of institutions to which these tools would apply could include building societies, investment firms, insurers and a variety of funds and investment vehicles. The Committee also agreed that it was minded to advise HM Treasury that the statutory FPC should have powers of Direction over a time-varying liquidity tool, but it could not sensibly specify the form that this tool should take until the international micro-prudential standards in this area had been agreed.

The Committee agreed that it might be useful for the statutory FPC to have powers of Direction in respect of the terms of collateralised transactions by financial institutions. But it concluded that this tool should be reconsidered once international discussions had progressed further.

In addition, the Committee agreed that powers of Direction over disclosure requirements would be desirable but that it could be difficult to meet the test set by HM Treasury in its February 2011 Consultation Document that powers of Direction should be specific.

Finally, the Committee noted that while powers of Direction over loan to value (LTV) and loan to income (LTI) restrictions could be beneficial for financial stability, use of these tools would require a high level of public acceptability. Other tools, such as the ability to vary sectoral capital requirements, might be able to achieve at least some of the same financial stability benefits. The Committee agreed that it should not advise that the FPC be given powers of Direction over such tools at this time, but it encouraged further debate of that possibility, and these tools may be appropriate after further analysis and reflection.

Conjuncture and previous recommendations

At its March meeting, the Committee also discussed economic and financial developments since its November 2011 meeting and progress made in implementing its previous recommendations. Immediate financial market tensions had subsided somewhat but the overall outlook for financial stability remained fragile. Banks had made some progress against the Committee’s three recommendations from November 2011. But the Committee remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks and noted that the ability to make further progress via greater restraint of cash distributions was limited. It therefore advised banks to raise external capital as early as feasible. The Committee would reconsider progress against all its recommendations at its meeting in June 2012.

Full statement

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