Today’s consultation document on financial regulation places the Bank of England at the heart of financial regulation and establishes an interim Financial Policy Committee to identify and reduce system-wide risks to the UK financial system, known in the jargon as macroprudential regulation.
The document is months late. That does not matter and it is clear that it has benefited from considerable thought about how the new Bank of England will work. The new Bank will maintain its objectives for monetary and financial stability, while adding banking supervision to its duties, and the new FPC will also have some, as yet undefined, powers to direct the PRA and the new Financial Conduct Authority (which we had known as the Consumer Protection and Markets Authority). These directions will aim to damp speculative credit bubbles when they emerge.
The FPC’s toolkit is broad and ranges from speeches and warnings to the possibility of higher bank capital ratios, higher risk weights for certain assets and direct limits on loan-to-value ratios or other collateral in lending.
But there are two significant problems with the new regulatory structure and the members of the FPC, much discussed outside the Bank, but not addressed in the consultation document at all.
UK monetary policy will need to be tightened more and at a faster pace than markets expect to bring inflation back to its target range, a member of the Bank of England’s monetary policy committee warned on Thursday.
Andrew Sentance, an external member of the MPC who has been urging modest rate rises since last summer, said that the medium-term view – generally presumed to be a two-year horizon – of his fellow MPC members revealed in the quarterly inflation report this week was “over optimistic”. Currently, the futures market for UK interest rates suggests that three rate rises are expected by this time next year, bringing the Bank rate to 1.25 per cent, from its current record low of 0.5 per cent.
Something went badly wrong somewhere in the eurozone banking system late on Wednesday evening. Use of the European Central Bank’s emergency overnight “marginal lending” facility jumped to €15.8bn on Thursday, the highest since June 2009, according to data just released.
The facility, which incurs a penal interest rate, is there to get banks out of unexpected difficulties in their daily liquidity management. So a sudden increase is not unusual and the latest spike may simply have been the result of a temporary glitch. But the amount borrowed is impressive, especially considering that June 2009 was still a time of considerable nervousness in financial markets.
Irish pluck and entrepreneurship remain undiminished by the country’s banking and economic crisis. John Bruton, the former Taoiseach (prime minister), was in Frankfurt today as ambassador for Ireland’s international financial services industry, arguing the case for its future growth.
The idea might send a chill down the spines of some in Frankfurt, including at the European Central Bank. Ireland has been the source of some of the biggest banking disasters to face the eurozone, including at branches of German banks.
Following a significant devaluation of the dong, the State Bank of Vietnam has just raised its refinancing rate two percentage points to 11 per cent, effective immediately. The Bank has also raised its overnight to 11 per cent:
- The refinancing interest rate is 11% p.a., and