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BOE’s FPC May Seek Powers Over U.K. Banks’ Liquidity Buffers

The Bank of England’s Financial Policy Committee said it may seek powers over liquidity buffers to manage risks across the banking system.

“A key risk faced by many financial institutions, and banks in particular, derives from the fact that they typically borrow funds on a short-term basis and lend over a longer term,” the FPC said in the record of its March 16 meeting, published in London today. It was “likely to be desirable, in due course, for the statutory FPC to have powers of direction over a liquidity instrument that would tackle the build up of such vulnerabilities.”

The FPC said it held off seeking such a power at the meeting as there is no “commonly accepted regulatory liquidity standard.” It will return to the liquidity issue once international standards have been agreed, it said.

The panel recommended earlier this month that Parliament give it tools in three areas. It requested powers of direction over countercyclical capital buffers, sectoral capital requirements and leverage ratios. The U.K. Treasury had sought guidance from the FPC on the tools it would need as the government overhauls regulation of lenders after the financial crisis.

The FPC expressed concern in today’s statement about the “lack of consistency across banks’ internal assessments of the riskiness of various categories of exposures.” It said control over a leverage ratio could be “an effective way of counteracting problems with mis-calibrated risks weights.”

Still, some FPC members said a leverage ratio would be a “crude backstop.” It noted that banks could respond by shifting balance sheets into riskier assets while maintaining the level of total assets unchanged.

In the record, the FPC repeated its March 23 statement on financial stability, saying while the outlook had improved, conditions remained “fragile.” It also said that banks with large exposures to some euro-area countries should be “particularly alert to the need to build capital.”

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