Bank of England tightens grip on stability drive

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The Bank of England further tightened its grip on the economy yesterday with the first meeting of its new Financial Policy Committee (FPC).

Charged with ensuring financial stability and avoiding a repeat of the banking crisis that plunged the world economy into recession in 2008, the FPC will publish its first recommendations as early as next Friday, 24 June, with a press conference.

Although not yet established by statute and with full powers to regulate the growth of credit, the FPC will still be able to exert some influence, through advice to the Financial Services Authority. In his Mansion House speech earlier this week, Mervyn King, the Governor of the Bank, said: "In devising new macro-prudential policy instruments, there is inevitably a degree of learning by doing.

"The FPC will be both doing and learning. In the wake of such a severe crisis, it is unlikely that excessive credit growth will be the major problem over the next few years. Indeed, the present problem is the reverse – lending is weak.

"We shall next week make recommendations in areas where, in our judgment, risks to the resilience of the system are increasing."

In its last Financial Stability Report, the Bank pointed to the following risks: contagion from the sovereign-debt crisis in the eurozone; consequent bank "fragility" in Europe; overheating in emerging-market economies; large flows of capital into financial markets in those countries; weakness in risk management; "latent distress" in the commercial-property sector.

As with the Monetary Policy Committee that sets interest rates, the FPC consists of internal appointments and external members. The members of the committee will be Lord Turner, the current chairman of the FSA, Hector Sants, the FSA chief executive, Michael Cohrs, Don Kohn and Alastair Clark, plus the Bank's deputy governors Paul Tucker and Charlie Bean and senior Bank executives Paul Fisher and Andrew Haldane.

The framework for the new FPC is confirmed in a White Paper published by the Treasury yesterday. The Financial Secretary to the Treasury, Mark Hoban, said: "This is a key milestone in the process of developing and implementing a new system of financial regulation, which will address the flaws in the 'tripartite' model that contributed to the financial crisis."