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From 1 July 2017, the finance and banking industry operating in the UK will be represented by a new trade association, UK Finance. It will represent around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation will take on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.x
Later this month the Bank of England’s new Financial Policy Committee (FPC) will meet to discuss risks to financial stability and whether anything can be done about them – “macro-prudential policy” in the jargon. Top of their agenda will be the housing market. Given the headline grabbing nature of its focus, now seems as good a time as any to reflect on the FPC’s purpose and powers.
The financial crisis exposed a glaring gap in the regulatory structure. For years, the focus had been on monitoring the health of individual financial institutions and on maintaining price stability. The Bank, Financial Services Authority and HM Treasury shared responsibility for financial stability but no one had a clear focus on the aggregate risks to the financial system or the measures needed to address them.
The FPC is the UK solution to that problem and has two statutory objectives: maintaining and enhancing UK financial stability in a manner which is consistent with the Government’s economic objectives, particularly those for growth and employment. This second part is essential because it prevents the Committee from taking measures that, as the Chancellor put it, would achieve “the stability of the graveyard”.
The FPC has two types of powers at its disposal. The first is a broad ranging ability to make recommendations which, when addressed to the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA), can be on a “comply or explain” basis. The second is the more technical sounding power of direction that allows the Committee to influence the cost and quantity of bank lending.
This is achieved by changing the amount of capital banks are required to hold either in total or against specific types of lending via one of two tools:
Experience with tools of this type in advanced, open economies is limited but some early examples suggest that SCR powers can change lending behaviour of banks. A 2010 decision by the Brazilian central bank to require banks to hold more capital against new long term car loans led to a 40 per cent drop in such lending over the next 18 months. Countries such as Sweden and Switzerland are also using similar powers to alter requirements for residential mortgages, but it is too early to assess the impact.
Given the difficulty of predicting the impact of a FPC decision with any certainty, what might all this mean for the UK’s housing market? A guide to the FPC’s potential next steps was set out in the November Financial Stability Review:
The FPC will debate these steps at its meeting on 17 June with the record of that meeting to be published on 1 July. This will be followed by the mid-year Financial Stability Review, which will be published the following day and give the Bank’s latest assessment of the current risks to UK financial stability. We might even see the UK’s first official foray into macro-prudential policy.