Destructive ambiguity

28 September 2011 By Peter Thal Larsen Follow @Peter_TL

The central bank’s Financial Policy Committee wants UK lenders to boost their reserves without shrinking credit in the economy. Banks can square that circle by ditching trading assets and cutting bonuses. But to be effective the FPC needs more levers to pull.

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The Bank of England’s Financial Policy Committee on Sept. 28 recommended that UK banks should “take any opportunity” to strengthen their capital and liquidity “without constraining lending to the wider economy”.
The FPC, which held its second meeting on Sept. 20, also acknowledged that, if risks crystallised, “it would be natural” for banks to reduce their capital and liquidity ratios.
Separately, the FPC concluded that, in order to fulfil its role of addressing risks in the financial system, it should be given powers over three areas of policy. These are: the balance sheets of financial institutions, the terms and conditions of transactions in financial markets, and market structures.

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