Of Special Interest


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27th March 2012

BoE governor UK speaks of financial stability tools 'experiment'

Sir Mervyn King, governor of the Bank of England told a conference that the Bank of England "knows absolutely nothing" about how the Financial Policy Committee (FPC) policy instruments will work in practice. He said: ". .One thing I want to stress is that this is an experiment. . . We know absolutely nothing about how these instruments are going to work. It is very important that we play it safe and be cautious.". The FPC is a new subsidiary of the Bank of England established by the current government. It gains statutory powers next year as part of the break up of the Financial Services Authority. Its brief is to deliver long term financial stability.

King explained that in is recent submission to parliament it had asked for three specific powers:

- the power to set countercyclical capital buffers;

- the ability to set higher capital requirements for specific sectors judged higher risk;

- the power to set leverage ratios.

It may, or may not, have been coincidental that the British Bankers Association chose the same time to make its requests of the FPC. Explaining the background Paul Chisnall, the BBA’s executive director for financial policy explained:

“The FPC will be publishing quarterly reports which will be watched closely. But while its equivalent on the monetary side - the Monetary Policy Committee - reports on a single, specific indicator for monetary policy (the inflation rate) there is no similar, single indicator for financial stability. The FPC will therefore be expected to exercise a greater degree of judgement when identifying possible threats to financial stability. As such, it will have a greater responsibility to explain any actions it considers necessary to prevent threats materialising.

“The FPC's remit to monitor risk is across the entire financial system and it will have the ability to recommend to the new regulator – the Prudential Regulatory Authority - a widening of the regulatory parameter if it sees a need.”

Moving on to the specific requests the BBA asked that the actions of the FPC should be determined by:

- a preference for simplicity;
- the need for transparency;
- an element of predictability;
- proportionality;
- international coordination

Apart from the UK, Switzerland is one of the only other European countries that has shown a strong interest in setting further banking financial regulation above and beyond the Basel III proposals. Few can argue that Mervyn King is right in stating that the FPC will be moving into an area where there are few precedents. It may also prove another case where his frankness may offend some within the Treasury.