Photographer: Chris Ratcliffe/Bloomberg

Bigger Buffers for Banks?

Bank of England to outline risks in financial system on Dec. 1

Mark Carney has an opportunity to fine-tune the U.K. economy this week as he wields tools the Bank of England acquired after the crisis.

A team of financial-stability officials, led by the Governor, will publish its latest assessment of risks and ways to reduce them on Tuesday, as well as the results of its 2015 bank stress tests. Policy makers have said they can use so-called macroprudential measures to see off risks stemming from more than six years of record-low interest rates, including potential overheating in the property market.

In focus right now is the countercyclical capital buffer, a tool introduced to strengthen the banking sector by pushing against lenders' tendency to boost lending in boom times and slash it in a bust. The Financial Policy Committee set the buffer at zero in September and said they’d review it once they had the stress-test results.

In the past, the committee looked at gap between the credit-to-GDP ratio and its long-term trend when considering the level of the buffer. It's wide, implying no need for an increase:

But the trend line is influenced by the pre-crisis peak that officials say wasn't sustainable, meaning this metric might not be the best guide.

Add to that a pledge to consider the appropriate buffer for "all stages of the cycle" and BOE Deputy Governor Jon Cunliffe's argument that there's a case for acting early, and you've got analysts from Investec, Morgan Stanley and Nomura saying action could come as soon as next week.

``The credit cycle is starting to pick up, although only a little,'' said Chris Hare, an economist at Investec. ``But the FPC seems keen to move sooner rather than later and if they don't move the capital buffer at this meeting, I'd expect them to point to increases at some point in the future.''

All will be revealed at 7 a.m. on Dec. 1, when the central bank publishes its latest Financial Stability Report. Carney, Cunliffe and Deputy Governor Andrew Bailey are due to give a press conference at 9 a.m.

They could be questioned on the implications for monetary policy after Carney said macroprudential measures could "slow the pace of growth in real time."

Should the FPC decide to activate the countercyclical buffer, "the additional capital requirements would ultimately be passed on in higher interest rates, to businesses and households, which would be akin to some form of monetary tightening," he told lawmakers in Parliament on Tuesday. "It would be done to ensure the sustainability of the credit cycle, and increase the resilience of banks to the credit cycle, but it could have that impact."


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