Daily Archives: December 19, 2011

Claire Jones

In its financial stability review, out today, the European Central Bank acknowledges that the vicious circle between a sovereign’s finances and the health of its banks has become far more pronounced in recent months.

Ultimately, what became painfully clear in the autumn of this year was that bank and sovereign vulnerabilities are inseparable in several countries. At the aggregate euro area level, partial solutions were no substitute for a comprehensive approach to stem contagion and the interplay between fiscal and banking sector vulnerabilities. These two factors needed to be considered in tandem – as two sides of one and the same coin.

The central bank also warns of another facet to this negative feedback loop: the deterioration in the growth outlook. Read more

Claire Jones

Former Bank of England deputy governor Sir John Gieve writes in today’s Financial Times that the plan to put the new Financial Policy Committee in charge of macroprudential policy might not be the best way to safeguard financial stability.

Instead the macroprudential toolkit could be handed to the Monetary Policy Committee, which would then have a broader remit to stabilise the economy as a whole, not just prices.

The objective and instruments to stabilise leverage and credit growth could go to the MPC, which would consider them alongside monetary policy in stabilising the economy. It would decide how far banks could use their buffers of capital and liquidity in a recession and, come the upturn, what combination of prudential and monetary tightening would best prevent excessive lending.

The other duties of the FPC, such making the financial network safer, could be carried out by the new Prudential Regulation Authority. Read more

Claire Jones

The Bank of England has pinned much of its hopes for the UK economy’s long-term success on economic rebalancing, ie, exporting more and importing less.

The fall in sterling, which depreciated by 25 per cent between mid-2007 and early 2009, was expected to help.

However, as a number of Monetary Policy Committee members have acknowledged, the depreciation has failed to have quite the effect that the Bank had hoped it would.

In an article published in the latest quarterly bulletin, out today, the Bank offers some insight into why that is. Read more