11 May 2012

Bank of England/Fisher: How the Old Lady will make banks safer

In his article, Fisher writes that spotting and taking actions to mitigate risk in the financial system will be a tough ask. But no one who has lived through this crisis would argue it is not worth the effort.

The Bank of England’s Financial Policy Committee (FPC) is not yet very familiar to the general public, certainly in comparison with the Monetary Policy Committee which sets interest rates. But it is truly groundbreaking, and has the potential to dramatically change the regulation of the British financial sector, making it safer and better able to support the economy, through bad times as well as good. Everyone in the country has a stake in the future success of the FPC, even if they don’t realise it yet.

It fills a huge gap in the regulation of the financial sector that was exposed by the recent crisis. Its job is to protect and enhance the resilience of the financial system as a whole in order to ensure stability in the provision of financial services to the real economy. No group of regulators has previously been given both the ability and the responsibility to meet this objective.

The FPC will have legal powers to direct the successors to the FSA – the new Prudential Regulation Authority (the bank supervisors) and the new Financial Conduct Authority (charged with responsibility for consumer protection and market conduct) – to take specific actions. It can also make recommendations to these bodies which they must implement, or explain publicly why not. And it can issue recommendations more broadly to help meet the FPC’s objective.

What has the FPC asked for?

• The first is the directive power to require banks to hold extra capital – essentially shareholders’ money – over and above the internationally agreed minimum standards, if risks are building up in the system.
• In addition, the FPC would like to be able to require firms to hold more capital against particularly risky types of lending.
• Finally, the FPC has asked for directive control of a simple leverage ratio – the ratio of total capital to total lending as defined by international standards – that provides a clear, comparable and simple way to limit the most excessive build up of risks on the balance sheets of our banks.

To apply even this limited set of tools will require a great deal of public support and that requires the FPC to be as transparent and accountable as possible. That is in everyone’s interests.

Full information

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