This is a logical and welcome step. An adjustment of the regulator’s capital and liquidity buffer requirements, that takes into account the Funding for Lending Scheme and the Expanded Collateral Term Repo facility introduced in June, will help banks lend to their customers. Put simply, capital and liquidity buffers would be ineffective as a policy tool if the authorities did not allow them to be used at appropriate times, or flexed to reflect changes in access to finance. Regulation is always going to be a balancing act, so it is helpful that the FSA has recognised that the economy needs both stable banks and banks that are able to lend. It is good to see too that the chancellor has acknowledged this by augmenting the Financial Policy Committee’s statutory objective to protect financial stability with a requirement that its actions should support the government’s economic objectives.
Simon Hills is executive director at the British Bankers’Association.
The approach of financial regulators to the banking system is increasingly incoherent. In the last year, regulators have made 14,200 new rules worldwide. At home, our government wants to ensure that failing banks are not a burden on the taxpayer, and a legal framework is being developed so that banks can fail safely. But, if this is achieved, we do not need the new onerous capital requirements that damage the economy. In tacit recognition of this, the FSA is relaxing the new capital requirements on loans under the Funding for Lending Scheme. The FSA is making the system look like the radio quiz game “Mornington Crescent”. Lower capital requirements in general would be welcome, but to start here is crazy. Taxpayers are explicitly on the hook if this scheme goes wrong and loans made under this scheme should not get special treatment.
Philip Booth is director at the Institute of Economic Affairs.