Bank of England Governor Sir Mervyn King has warned European legislation should not limit the ability of the Financial Policy Committee to vary capital requirements it imposes on UK banks.
The interim FPC meets for the first time today and will work on developing macroeconomic tools to ensure financial stability which will be used by the committee proper when it begins operating in 2012.
Those tools could include the ability to counter-cyclically apply capital and liquidity requirements as well as setting loan-to-value or loan-to-income ratios.
In his annual Mansion House address last night, King said the 7 per cent core tier one capital requirements set out under Basel III were a minimum, not a maximum and that member states must be able to increase it as they see fit.
He said: “As the IMF made clear in its recent report, it would be misguided for the EU Capital Requirements Directive to prevent member countries from imposing higher capital requirements to protect the interests of domestic taxpayers.
“Nor should European legislation try to prevent the FPC from varying macro-prudential instruments to national circumstances.
Last month, EU internal market commissioner Michel Barnier rejected reports the commission may water down rules set out in Basel III, but last night King said he is still concerned this may happen.
He said: “A crucial part of the new Basel III framework is the recognition that only common equity is ultimately a truly loss-absorbing layer of capital. I am therefore concerned that the European Commission will propose a weakening of Basel standards in that area.”