Bank of England official Michael Cohrs said countries’ focus on bolstering lending to promote growth raises the risk of promoting excessive debt that may exacerbate economic fragility.
“If we push too hard on the lending theme we will simply raise default levels, as more of the borrowers will not be credit worthy,” Cohrs, a member of the bank’s Financial Policy Committee, said in a speech in Bristol today. “There is no silver bullet to quickly fix the current economic situation.”
His comments come days after the central bank’s Monetary Policy Committee halted its quantitative-easing program, leaving as its main policy tool the Funding for Lending facility aimed at encouraging lending to stimulate growth. Cohrs said it’s “rational and prudent” in current circumstances for companies and households to reduce debt, so a lack of demand for new borrowing isn’t surprising.
“The current low levels of lending are partially because credit worthy companies and households have decided to either get their house in order or deleverage to protect themselves from the storms we currently are feeling or they see coming in the next few years,” said Cohrs, who is also a member of the Bank of England’s Court of directors.
Improving financial stability will require infusing banks with a “fear of failure,” according to Cohrs. He said officials should implement in full proposals on capital levels by John Vickers, a former Bank of England chief economist, as well as new bank-debt rules recommended by Erkki Liikanen, a member of the European Central Bank governing council.
“If Liikanen and Vickers are enacted in full force there will be a considerable benefit, particularly as they both should make complying financial institutions that much easier to put into a resolution process should they fail,” Cohrs said. Officials shouldn’t be too concerned about implementing capital requirements that are excessively strict, he said.
“I believe it’s better to err on the size of caution,” he said. “We should worry more about ensuring that our financial institutions are well capitalized, are very liquid and have lower leverage than worrying so much about the effect that regulatory actions might have on their behavior.”
He also said officials can accelerate the timetable to implement new rules to bolster the safety of the financial system without undermining services to clients. Banks could target their trading-related items to reduce their size and be easier to regulate.
“We shouldn’t wait until 2019,” he said in the speech at the University of the West of England in Bristol. “Banks can downsize and de-lever without unduly impacting their ability to provide necessary services to their clients if they so wish.”
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