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Government publishes consultation on macro-prudential tools for the Financial Policy Committee

A consultation on what tools the new Financial Policy Committee should have in order to help ensure future financial stability was launched yesterday by Financial Secretary to the Treasury, Greg Clark.

The consultation, entitled The Financial Services Bill: the Financial Policy Committee’s macro-prudential tools, sets out the proposed tools that it will be able to use to address systemic risks to the UK financial system.  These include:

  • control over the level of the UK’s counter-cyclical capital buffer;
  • a direction-making power to impose sectoral capital requirements; and
  • once international standards are in place, the power to set, and vary over time, a leverage ratio cap.

Financial Secretary to the Treasury, Greg Clark said:

“This Government is committed to reforming the failed system of financial regulation.

“In establishing the Financial Policy Committee, the Government is creating a strong, macro-prudential authority that will identify and address potential risks to stability in the financial system.  But to be effective it must have the appropriate tools.

“Today we are consulting on our proposals for what those tools should be.”

The creation of the Financial Policy Committee as a strong, macro-prudential authority within the Bank of England is a key element of the Government’s reforms to the UK’s system of financial regulation, which will be enacted by the Financial Services Bill.

Even when firms are considered stable on an individual basis, the aggregate behaviour of firms can seriously damage the stability of the financial system. It will be the responsibility of the Committee to oversee the system as a whole, identify potential risks to its stability and take concerted action to address them.

In order to address systemic risks to the UK financial system, it will have broad powers of recommendation and a power to issue directions to the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), using macro-prudential tools set out by the Treasury in secondary legislation.

The consultation being launched today is based on the recommendations made to the Government by the interim Financial Policy Committee.

Notes for Editors

1. In his Mansion House speech on 15 June 2010, the Chancellor of the Exchequer, George Osborne, outlined the Government’s plans for reforming the regulatory system, including the creation of an independent Financial Policy Committee at the Bank of England, a new prudential regulator as an operationally independent subsidiary of the Bank (the Prudential Regulatory Authority), and a new independent conduct regulator (the Financial Conduct Authority).

2. The Government introduced the Financial Services Bill to Parliament on 26 January 2012. The Bill is currently undergoing scrutiny in the House of Lords. The Bill and related documents can be found on the Treasury’s website.

3. In advance of the legislation needed to implement the reforms, the interim Financial Policy Committee was created on 17 February 2011 as a committee of the Court of the Bank of England. The interim Financial Policy Committee is designed to undertake, as far as possible before formal legal powers are created, the permanent body’s macro-prudential role, in addition to vital preparatory work and analysis into potential macro-prudential tools. The interim Financial Policy Committee published its recommendations on macro-prudential tools for the permanent Financial Policy Committee to HM Treasury on 22 March 2012. These recommendations are available on the Bank’s website.

4. The Government seeks respondent’s views on this consultation document. Responses are requested by 11 December 2012.

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