Moody’s warns of policy clash between growth and stability

 
Tim Wallace
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NEW POWERS for the Bank of England to control banks’ capital buffers should be good for financial stability in principle, ratings agency Moody’s said yesterday.

But it warned the Financial Policy Committee’s (FPC) joint mandate to promote stability and growth could lead to friction.

“If the FPC lowered capital requirements to stimulate growth in a recession, it would likely conflict with the micro-prudential regulator’s objective to mitigate solvency risks of individual institutions,” said the report.

“Even if the overall effect on the financial system was positive, the FPC lowering capital requirements would be credit negative for particular investors if the bank in which they had invested became undercapitalized relative to its current risk profile.”

The FPC also has tools to prevent damaging bubbles from growing in financial markets – but Moody’s said the decision on when and how to use those could become political.

“Only the next cycle will determine whether macro-prudential regulators such as the FPC can really “take the punch bowl away” while the party is in full swing,” it concluded.

“It will also determine whether the FPC will succeed in encouraging banks to increase net lending in a downturn.”