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Give macro-prudential oversight back to BoE, say peers

The House of Lords economic affairs committee has called for macro-prudential supervision to be given to the Bank of England financial stability committee, rather than left with the FSA.

In its Banking Supervision and Regulation report, published today, the committee says the FSC should have “direct access to the information required and a suitable policy instrument to counter pro-cyclicality in the banking sector”.

The committee adds it is concerned about the Government’s plan not to give the FSC executive powers, claiming this would leave it ineffective.

The committee recommends that the FSC should be chaired by the governor of the Bank of England and include senior representatives from the FSA and the Treasury.

It is calling for modification of the Memorandum of Understanding governing the relationship between the tripartite authorities to give decision-making powers to one authority whenever they are not clearly assigned.

The Committee is also recommending that regulators should focus more closely on the risk models used by banks.

It says: “The committee concludes that prior to the financial crisis banks were using short term risk models which relied too heavily on recent financial data. With limited data, towards the end of any period of economic boom risk models paint a rosy picture which can lead to speculative bubbles.

“Regulators should rigorously question the assumptions in banks’ risk assessment models, insist that they calibrate their models over long periods and submit risk models to regular stress tests.”

Other recommendations in the report include increases in regulatory capital requirements for assets on banks’ trading books, central reporting and clearing of credit default swaps and greater oversight by the British authorities of UK branches of multinational banks.

In addition the Committee is calling for the development of policies to counter pro-cyclicality in existing regulations, regulate and supervise liquidity, improve bank governance and remove agency ratings from capital regulations.

House of Lords economic affairs committee chairman Lord Vallance says: “We need to acknowledge that the regulations and their application contributed to the crisis, and made it worse when it came, because among other things, they had a pro-cyclical bias, did not pay enough attention to liquidity, and were wide open to regulatory arbitrage.

“It is also clear that in the UK the tripartite authorities of the Bank of England, FSA, and the Treasury failed to maintain financial stability, in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision in the period when ‘boom and bust’ was mistakenly assigned to history.

“We recommend early action to improve focus on financial stability in future. One way to help achieve this would be to return responsibility for macro-economic supervision from the FSA to the Bank.”

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  1. Torild Bastien, Iver Mortgage Company 2nd June 2009 at 10:26 am

    House of Lords
    Another reason for keeping House of Lords as it is!

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