The Bank of England’s Financial Policy Committee set aside a proposed recommendation to suspend liquidity rules to encourage lending at its meeting last month, citing the benefit to stability from those rules.
The bank’s 11-member FPC recommended after the meeting that regulators should make clearer that banks can use liquid asset buffers in the event of stress to encourage lending. At the meeting, the panel discussed whether there was a case for “going further” by suspending the liquidity rules.
“Suspension might provide the clearest message to banks that they could reduce their liquid asset holdings,” according to the minutes of the June 22 FPC meeting, published today in London. “Given, however, the uncertainty about how far regulatory requirements were the key constraint, and recognizing the benefits that had accrued from the regime over recent years, including incentivising safer funding structures, this option did not command support.”
The FPC unveiled five recommendations on June 29 to enhance the safety of Britain’s banking system, including that capital buffers may need to temporarily exceed requirements implied by the transition to Basel III standards. The recommendation on liquidity followed concerns that strains in credit markets were impeding banks’ ability to lend.
The FPC said there were “macroprudential grounds for banks using their liquid asset holdings to facilitate greater lending, with positive consequences for the economy and in turn resilience over the medium term.”
The panel also noted the government’s announcement that it would amend the Financial Services Bill to give a secondary objective that the FPC must “support the economic policies of the government, including its objectives for growth and employment.”
“It was noted that the primary objective, to protect and enhance resilience, and the new secondary objective were compatible,” the minutes said. Still, it would put “more onus on the committee to articulate the rationale for its policies.”
The FPC is operating on an interim basis while the legislation to formalize its powers is considered in Parliament.
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