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King has fears over Euro barrier

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 met for the first time last week to start developing macroeconomic tools to help ensure financial stability which will be used 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 week, King said the 7 per cent core tier-one capital requirement set out under Basel III was 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 pre-vent 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 that the commission may water down rules set out in Basel III and allow banks to count more of the capital in their insurance subsidiaries toward the requirements, but King said he is still concerned this may happen.

It also emerged last week that around 30 of the world’s most systemically important financial institutions will be placed into “buckets” carrying extra capital requirements of between 0.5 and 2.5 per cent.



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