The Financial Policy Committee could be given powers to dictate capital and leverage requirements for banks, building societies and insurers, if proposals published by the Bank of England this morning are accepted by Government.
The Financial Policy Committee will sit within the Bank and begin operating next year. It is tasked with protecting and enhancing financial stability in the UK by monitoring and taking action against emerging macro-economic risks.
To pave the way for the FPC, an interim committee was set up to begin looking at how to spot risks and potential tools to tackle them.
In a statement released today, the interim FPC says the committee should be able to set counter-cyclical capital buffers, sectoral capital requirements and leverage ratios. The proposals will be considered in the coming months as part of a public consultation.
The statement says: “In addition to banks, the range of institutions to which these tools would apply could include building societies, investment firms, insurers and a variety of funds and investment vehicles.”
Power over counter-cyclical capital requirements would give the committee an ability to add a ’buffer’ to capital requirements based on the current cyclical position of the economy. This should increase the resilience of the banking sector by giving it more capital to absorb losses in any subsequent downturn, and may also damp the cycle by reducing lending in an upswing.
The ability to set sectoral capital requirements would mean the FPC could apply capital requirements against exposures to specific sectors with more precision than the standard counter-cyclical capital buffer tool.
Setting and varying leverage ratios would mean the FPC can set limits on financial institutions ability to increase their overall exposure compared to their ability to absorb losses.
Responding to the proposals in a letter to Bank of England governor Mervyn King, Osborne says: “The Government has committed to a public consultation on its proposals for the FPC’s toolkit during the passage of the Financial Services Bill, and the FPC recommendations will inform those proposals. This will provide an essential opportunity for public and Parliamentary scrutiny.”