30 May 2012

UK Treasury Committee publishes terms of reference for inquiry into Bank of England's macro-prudential tools

The Treasury Committee published the terms of reference for an inquiry into the macro-prudential tools that are set to be handed to the Financial Policy Committee of the Bank of England (FPC).

The Financial Services Bill proposes giving the FPC powers of direction over the Financial Conduct Authority and the Prudential Regulation Authority and the power to make recommendations to a wide range of parties. Taken together, these powers of direction and recommendation constitute the FPC’s ‘macroprudential tools’.

The interim FPC of the Bank of England recently published its advice to the Treasury about the powers of direction it should have. These were:

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

Commenting on the inquiry, the Chairman of the Treasury Select Committee, Andrew Tyrie MP, said: “With these new tools the Bank [of England] will have a profound and even more direct impact on millions of individuals, households and businesses up and down the country. The powers of direction provided to the FPC, when used, will affect the terms on which people can obtain mortgages and firms can obtain loans. But the interim FPC did not ask for this power on the grounds that the ‘use of these tools would require a high level of public acceptability’. That reveals a lot.”

The Committee would welcome evidence on the following areas:

1. whether the interim FPC has requested the most appropriate tools over which the FPC should be given the power of direction;
2. whether additional tools should be given to the FPC (these may include tools rejected by the FPC, not considered by the FPC or that use the balance sheet of the Bank of England);
3. the extent to which the FPC’s powers of recommendation are appropriate, and how they will work with the powers of direction;
4. what structures should be created to provide the necessary transparency and accountability structures for the use of the tools;
5. whether the FPC should provide guidance on the use of the tools, and if so, what form that guidance should take;
6. whether the tools requested, taken as a whole, should be symmetrical, that is,  the extent to which they should ameliorate downturns as well as upswings in credit cycles;
7. what further analysis should be provided by the Bank of England before the macro-prudential tools are granted to the FPC, and what analysis should be periodically produced by the Bank of England once any tools have been introduced.

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