Bank of England prepares for capital level powers

Tim Wallace
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THE BANK of England will soon have major powers to adjust banks’ capital levels as it sees fit, adjusting regulatory requirements to try to match economic conditions, according to new government proposals unveiled yesterday.

The new Financial Policy Committee (FPC) is being established to maintain stability in the sector – for example by bursting asset bubbles when it sees them building.

Yesterday the government launched a consultation on the proposed new macro-prudential powers – controls that the FPC will be able to apply to the banking system as a whole.

Under the plans, regulators will have control over the level of the UK’s counter-cyclical capital buffer, power over sectoral capital requirements, and power to set and vary a leverage ratio cap.

The consultation also asks whether the FPC should in future be able to ask for powers over loan to value ratios in the mortgage market, though that control is not an option currently on the table.

The counter-cyclical buffer will be designed to push up bank capital levels in years of good economic conditions, giving banks a cushion to eat into in bad years, in an attempt to ensure banks can keep lending at a steady pace despite the ups and downs of the business cycle.

That buffer also stops banks lending too much in the good years, potentially reducing the likelihood of another damaging credit boom building as it did in the last decade.

Meanwhile the power over sectoral capital requirements means the FPC can force banks to set aside higher levels of capital against sectors it deems to be overheating – such as commercial property, for example.

And control over leverage ratios means the Bank of England will be able to decide how much lending a bank can make overall, limiting how far it can extend its balance sheet.

The consultation will run until 11 December.

The FPC is not being given powers to regulate banks on an individual basis, as the authorities believe one of the key lessons of the financial crisis is that institutions individually often looked stable, but the risks building in the system as a whole were not noticed until the crisis erupted.