LONDON (MNI) – Bank of England Governor Mervyn King has welcomed
the decision of the new government to give the UK central bank new tools
to regulate the stability of the banking system and of individual banks.

King said that the new macro-prudential powers would provide for a
“counter-cyclical” approach to easing the current tight credit
conditions.

In his Mansion House speech, King said that the credit crisis had
shown the need to involve central banks, especially at a time when
government money had to be deployed to salvage the financial system.

The new macro-prudential powers of the central bank would have made
a major difference during the crisis, King said and could help to temper
the economic downswing.

“It is not difficult to see what role such a macro prudential
regime might have played in the run-up to the crisis. A progressive
tightening of capital standards…would have helped rein in the
near-tripling of UK bank balance sheets between 2002 and 2007,” King
said.

King continued:

“But a macro prudential regime also has a key role to play in the
downswing phase of the cycle. Since 2008, credit conditions have
tightened, jeopardising the recovery and, in turn, threatening renewed
losses for banks. By allowing banks to draw on their macro prudential
capital buffers, while credit conditions remain tight, the system is
counter-cyclical”.

“By altering the pressure on the financial brakes according to
circumstances, regulation, far from being an inflexible foe, would
become a flexible friend”.

King said the next few years would see the setting up of a
framework for financial stability to parallel that for monetary policy.

“As we have seen, one without the other is not enough. Just as the
role of a central bank in monetary policy is to take the punch bowl away
just as the party gets going, its role in financial stability should be
to turn down the music when the dancing gets a little too wild.”

The governor spelled out the distinction between the BOE’s new
powers – micro-prudential on the one hand and macro-prudential on the
other. The first would involve fixed capital requirements set for each
institution which cannot be breached.

The second would be “an overall perspective with a set of
system-wide capital requirements that vary over the economic cycle.
Judgements on the level of these capital buffers will be part of the
remit of the new Financial Policy Committee”.

Both the prudential regulator and the FPC would be based within
the BOE – a ‘sensible’ innovation, King said.

King said that Hector Sants – CEO of the Financial Services
Authority – would eventually take over the BOE’s prudential regulator
with longstanding senior BOE official Andrew Bailey becoming deputy CEO
of the new prudential authority.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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