FPC ponders move to boost bank lending

 
Julian Harris
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SOME senior officials on the Bank of England’s new regulatory body want banks to tap their liquidity buffers in order to boost lending and stimulate the recovery.

Yet the majority of members on the Bank’s new Financial Policy Committee (FPC) decided that banks should continue to “strengthen levels of capital and liquidity”, the minutes to its September meeting revealed yesterday.

The outspoken minority on the FPC argued: “It would be natural in current stressed funding market conditions for banks’ liquidity buffers to fall, and this could occur without dangers to market confidence provided that capital ratios were maintained at high levels.”

Nonetheless, the FPC concluded: “It would be inappropriate in current circumstances for banks to reduce capital or liquidity ratios.”

The committee used its September meeting partly to discuss whether regulatory interventions designed to stimulate the supply of credit could be “helpful in maintaining overall financial stability.”

Yet some members of the FPC questioned whether it was even within the Financial Services Authority’s (FSA) remit to use regulatory tools for the sake of “potential collective benefits.”

The FPC currently acts in an advisory role to the FSA, but is set to adopt regulatory powers of its own as its role expands.

The FPC appears tempted to use regulatory powers to shape the banks’ balance sheets. “Leaning against the pro-cyclical tendency of individual banks to restrict lending as risks rose might have positive feedback effects, reducing overall credit risks on banks’ balance sheets and enhancing the resilience of the system,” the minutes said, despite finally rejecting the idea.