Bank of England markets director Paul Fisher said the bank’s new financial-stability powers may create trade-offs as officials try to balance strengthening banks with maintaining support for economic growth.
The central bank’s interim Financial Policy Committee holds its fourth meeting on March 16, and will recommend to Parliament the tools it would like to have to improve the stability of the financial system. Fisher sits on that panel, as well as on the Monetary Policy Committee (UKAPTARG), which this month held its bond- purchase target at 325 billion pounds ($508 billion).
“Although I think conflict between the policies of the MPC and FPC is unlikely, that does not mean there won’t be difficult choices and trade-offs for each committee to wrestle with,” Fisher said in a speech in London today. Officials “are trying to address this by, for example, balancing appropriate targets for capital and liquidity in the medium-term with a long transition period to meet them. That should help ensure that banks don’t need to rush to meet these stability objectives in the short-term, at the expense of lending to the real economy.”
Fisher also said the FPC may struggle to “assuage fear on the way down” if it tried to, for example, get banks to relax capital ratios while in an environment where investors are “looking nervously” at lenders’ buffers.
“Somehow, macroprudential policies, whilst alerting everyone to the very real risks facing them, need to support confidence in returning the financial system to a sustainable path,” he said.
The FPC will advise the Treasury on what tools it needs to ensure financial stability after its meeting this week. Fisher said that where the panel has power to direct regulators to implement its decisions, “tools will need to be effective at addressing systemic risk, efficient in not generating unwanted spillovers, specific and transparent.” The FPC will also make recommendations on a “comply or explain” basis, and advise the government on the range of activities that should be regulated by keeping a “close eye” on so-called shadow banking.
A press statement of the FPC’s meeting this week will be published on March 23, and a record on March 28.
“Overall it is still early days for the FPC, and there remain significant challenges going forward,” Fisher said. “Most pressingly, we need to do what we can to ensure that the U.K. banking system increases its resilience to shocks, particularly given the backdrop of subdued domestic growth and the precarious economic situation in some European countries.”
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