Speaking at the European Business School in London last week, Gieve said, in the medium term, changes have to be made to capital requirements to help banks survive future downturns.
He said: “Events also brought home the need for a fundamental review of both the amount and the definition of capital requirements.”
Gieve highlighted the need to reassess Basel II and a need for a growth-based component when assessing capital requirements. He said: “This component could be linked either to the economy-wide growth rate or a particular type of business.
“This would make it more expensive for banks to exp- and their balance sheets faster than normal when confidence is high and could be a useful means of dampening banks’ contribution to the business cycle.”
He also pointed to the Spanish example as a means to support the upturns and downturns of the banking cycle.
He said: “The Spanish system requires banks to build a general reserve that can be drawn on in downturns. For each period, banks are required to make general provisions equal to the difference between the inherent losses, based on the growth of loans and a long-term average of incurred losses, and the specific provisions on impaired assets for the period.”
Conservative Shadow Treasury Financial Secretary Mark Hoban says the Tories fully support Gieve’s suggestions. He says: “This is what David Cameron and George Osborne have been discussing for some time. We now need counter-cyclical capital requirements to ensure stability in the future.”
The latest monetary policy committee minutes, published last week, hint that a further rate cut of 0.5 per cent could be on its way next month.