The Government has rejected calls from banks to modify the Financial Policy Committee’s objective to maintain a stable and sustainable supply of credit.
The bill also sets out explicitly for the first time the need for the committee to take account for the risks posed by the inter-connectedness of firms.
The FPC will sit within the Bank of England (pictured) with responsibility for taking action against threats to the stability of the UK’s financial system. It will have a non-binding remit set by the Treasury and its specific stability strategy will be set out by the Bank’s Court. An interim-FPC is currently considering what tools it will need to maintain financial stability in the face of domestic and international threats.
In September, the British Bankers Association called for the FPC to be required to take into account the supply of credit. But in guidance to the financial services bill, published today, the Government rejects the calls saying existing safeguards which require the FPC’s actions not to have a “significant adverse impact on the ability of the financial sector to contribute to the UK economy in the medium or long-term” go far enough.
It says: “The Government is clear that the current formulation of the FPC’s objective, focusing on the importance of increasing the resilience of the financial sector and identifying and addressing systemic risks, represents a clear and credible approach.
“Such a narrowly defined objective as ensuring a stable and sustainable supply of credit would exclude many potential sources of financial instability, such as interconnections between firms, risks associated with activity taking place outside the perimeter of regulation, and structural risks.”
In September, BBA chief executive Angela Knight wrote to Treasury financial secretary Mark Hoban asking him to reassess the remit of the FPC because financial stability is not an easily definable target like the Monetary Policy Committee’s 2 per cent inflation target.
The letter said: “We believe the role of the committee would link up with monetary policy and fiscal policy in a much more coherent way if its task were defined by reference to maintaining a stable and sustainable supply of credit to the economy rather than by reference to financial stability which many have professed to find impossible to define in a meaningful way.”
In November, HSBC chief executive Stuart Gulliver told the joint committee on the draft financial services bill: “The way the FPC has been set up is that it is focused entirely on stability. You could see a situation where everything has been secured to such an extent that there is no risk of a failure but there is no credit going into the economy either.”