BEHIND THE LINES | WE ANALYSE THE FPC STATEMENT

“Banks should take any opportunity they had to strengthen their levels of capital... without constraining lending... This could include raising long-term funding whenever possible and ensuring that discretionary distributions reflected any reduction in profits.


The Financial Policy Committee is happy with banks building up their liquidity levels to protect themselves from future shocks – but also wants them to boost lending, in order to stimulate the economy. How can they do both? Simple, the FPC says: cut back on bonuses and shareholder dividends.

“The committee’s...understanding...would improve with experience. As such it was minded to recommend a relatively narrow initial set [of powers], which could then evolve. Furthermore, innovation and change within the financial system would give rise in due course to new risks...”

The new committee as yet does not have any regulatory powers, but is advising the Financial Services Authority (FSA). With time it will acquire powers of its own with which to regulate financial companies’ practices. The FPC is suggesting that it build up these powers incrementally.