LATORS should lower banks’ liquidity requirements to help them fight the current crisis, top Bank of England official Paul Tucker said last night, arguing that tight constraints are damaging the sector and the wider economy.
The very public intervention shows that Tucker would be a more flexible regulator than outgoing Bank governor Sir Mervyn King.
Tucker is in the running to replace King, and yesterday demonstrated he would try to promote growth, not just price stability.
Tougher capital and liquidity requirements are being put in place by regulators in an effort to ensure banks are better prepared for any future financial crisis than they were in 2008.
Regulators are pushing banks to build up buffers now, well in advance of the 2019 Basel III deadline in the hope of making them safe in good time.
However, that means central banks are pumping liquidity into the system to boost the economy, but banks are using that to bolster their regulatory buffers, preventing the authorities from achieving their current aims.
“There is less of a case for regulators to require banks to rebuild their stock of liquid assets in current conditions,” said the Monetary Policy Committee (MPC) member.
“At the least, banks need to be free to draw on their liquidity buffers in order to absorb current pressures. And, so far as possible, we should see whether we can liberate this part of their balance sheet in these stressed times.”
These contradictory aims and results show a lack of “joined up analysis” by the authorities, he said.
Tucker also said central banks need to learn the lessons of the “lending boom, fuelled by lax credit conditions,” which he believes illustrated the lack of macroeconomic tools available to fight bubble.
In particular he said that the one-size-fits-all monetary policy of the Eurozone helped build Spain’s housing bubble, which was as large as Britain’s before the crash.
In addition, he called for greater competition in the banking sector, arguing that the impact of a bank going bust in a concentrated market is far greater than in a more competitive one.