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Bank of England urges reform to financial policy

THE BANK OF ENGLAND will call today for an overhaul of the British financial system as a response to the events of the crisis and outline areas where policy changes are needed.<br /><br />The Bank&rsquo;s biannual Financial Stability Report published today says that conditions have improved but authorities need to strengthen financial system resilience so that a similar financial crisis cannot happen again.<br /><br />Paul Tucker, the Bank&rsquo;s deputy governor for financial stability, said: &ldquo;No particular initiative will be sufficient by itself and greater resilience will need to be based on a variety of measures.&rdquo;<br /><br />The Bank outlines five key areas where it thinks change is needed, including stronger market discipline, greater self-insurance and the size of banks, which should not be so big that they cannot be supervised or wound down.<br /><br />The Financial Services Authority (FSA) said earlier this week that large banks would not be forcibly broken up by the authorities. <br /><br />However, the Bank agreed with the FSA that banks&rsquo; capital and liquidity requirements should consider the risk that the institutions bring into the system so that they are not as exposed again.<br /><br />The Bank says in the report: &ldquo;In the future, capital buffers should comprise only common equity to increase banks&rsquo; capacity to absorb losses while remaining operational. Regulators should require banks to build up buffers during periods of strong earnings to absorb losses in times of stress.&rdquo;