Watchdog reveals powers it wants to control banks

Britain's new financial sector super regulator, the Financial Policy Committee (FPC), yesterday laid out its full ambitions to gather a range of powers to rein in the excesses of UK banks.

The FPC released a discussion paper in which it proposed to appropriate for itself a host of new "macroprudential" policy tools, including the ability to set leverage caps on banks, curb bonus payments to employees, impose counter-cyclical capital buffers and limit loan-to-value ratios on new mortgage lending. Such tools have been mooted before, but this is the first time the proposals have been collected together in one, comprehensive document.

The inclusion of counter-cyclical capital requirements in the report indicates an intention on the part of the FPC to go beyond the incoming international Basel III capital rules as it attempts to make UK banks safer and prevent a repeat of the 2008 crash.

The discussion paper was drawn up jointly by financial sector analysts at the Bank of England and the Financial Services Authority, who will be joined together to form the FPC when the new regulator becomes fully operational in 2013. The Bank of England Governor, Sir Mervyn King, who will lead the new regulator, warned it must not be underpowered.

"Without the right instruments at its disposal, the committee will not be able to take prompt, effective action to tackle emerging risks," he said.

The policy document suggested that limits on loan-to-value mortgage lending by banks would help to prevent booms and busts in the housing market. Mandated restrictions on dividend payments to shareholders and bonuses to bank staff could help the wider sector raise capital in times of financial stress since, according to the report. It argued that banks are afraid at the moment that reducing these discretionary payments will be interpreted as a sign of weakness by investors.

Other policy tools that the FPC put up for discussion included the power to force banks to increase their provisioning for bad loans, countercyclical liquidity buffers, tighter margin requirements and regulation of central counterparties. As well as listing the benefits that these various tools would confer, the report also examined the disadvantages and problems associated with each.

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