London (MNI) – The Bank of England’s Financial Policy Committee may
seek powers to cap banks’ dividends, impose maximum leverage ratios on
them and force them to seek more capital than required under
international standards.

The proposals are set out in a Bank staff document for the
Financial Policy Committee which sets a range of policy tools that could
be used for macroprudential policy. The tools, which go well beyond
agreed minimum international standards, are designed primarily to
increase the resilience of the UK banking system.

Among the tools the BOE discussion paper proposes is a restriction
on bank distributions, which could take the form of capping cash
dividends. The FPC has been looking at this as it could be useful in a
downturn, limiting disruption of credit supply – leaving banks with more
cash to use for lending.

Several of the tools set out in the BOE paper are designed to give
the FPC the powers to force banks to increase capital.

These could clash with European Union proposals to impose maximum
capital requirements. The tools will need to be approved through
secondary legislation.

The timetable for their adoption is that after the FPC’s March
meeting it will go to the Treasury with formal advice on which tools it
wants and the legislation is expected to be completed next year

The aim is to have these new regulatory powers in place by 2013.

The BOE staff paper published Tuesday is designed to set out the
range of options for the FPC and to generate feedback from the financial
sector and other interested parties.

The capital boosting powers include the use of countercyclical
liquidity buffers and sectoral capital requirements. The latter would
set capital buffers over and above the minimum requirements on exposures
to certain sectors.

The aim of sectoral capital requirements would be to “nip problems
in the bud”, restraining lending to some sectors in a boom and
supporting lending to them in a downturn.

“At certain points in the cycle, it may be useful to apply
different risk weights to new and old loans to influence the flow of new
lending relative to its stock,” the paper also says.

–London newsroom: tel+44 207 862 7491; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]