–BOE Paper Warns New FPC Macroprudential Tools May ‘Leak’
–S&P Warns On Safety Of Major UK Banks’ Ratings Due New Bill

LONDON (MNI) – UK Chancellor of the Exchequer George Osborne said
today that the new Financial Services Bill would eliminate any ambiguity
about who is responsible for the banking system in the event of another
financial crisis.

Speaking at the CBI British Business Leaders Lunch at the World
Economic Forum in Davos today, Osborne highlighted the clarity over who
will be making the decisions under the UK’s planned new regulatory
regime. His comments come, however, as a new BOE working paper was
published highlighting the risks if bank regulation is not co-ordinated
across borders.

“There will be no ambiguity about who is in charge. During normal
times the independent Bank of England will be responsible for prudential
regulation and systemic stability, accountable to Parliament. But in a
crisis, when taxpayers’ money is at risk, both the responsibility and
crucially the power to act will rest with the Chancellor of the day. I
hope that we will never again see the paralysis and confusion that did
so much damage when the latest crisis hit,” Osborne said.

Osborne slated the old ‘tripartite’ system under which financial
regulatory powers were shared between the Financial Services Authority,
the UK Treasury and the Bank of England.

“Everyone was so focused on ticking off a regulatory check-list
that nobody felt it was their responsibility to use their judgement. The
astonishing result was that RBS was allowed to take over ABN Amro when
the credit markets had already frozen up. And crucially it was unclear
who was in charge in a crisis when taxpayers’ money was at stake”.

Osborne continued “We are putting in place clear lines of
accountability, and restoring that crucial element of judgement. One
body will be put back in charge of prudential regulation and systemic
stability – the Bank of England”.

The chancellor also noted that the new Financial Policy Committee
of the BOE would be charged with monitoring the evolution of leverage
and risk in the financial system and in the wider economy as a whole.

The new committee is set to be equipped with new macroprudential
policy tools in order to influence credit supply and avoid booms and
busts.

However, a new working paper from a BOE researcher published today
suggests that such tools could suffer from ‘leakage’ if proper
cross-border cooperation is not assured at the same time.

Using evidence from the 1998-2007 period, the paper shows that a
tightening of capital requirements for specific UK-regulated banks under
Basel I led to a fall in lending by these institutions. UK branches of
non-UK-regulated foreign banks, however, increased their lending in
response during this period.

This is a highly contentious point. The UK’s financial authorities
are currently resisting plans by the EU Commission to impose maximum
capital requirements on EU banks. BOE Governor Mervyn King believes that
this move would undermine the powers of the central bank to effectively
use its new macroprudential policy tools.

Standard & Poor’s, in a new report, on large, systemically
important UK banks out today says that the new UK supervisory regime
will not alter the ratings of UK Banks immediately, but warns that this
could change in the future.

The agency said that it would continue “to factor notches for the
likelihood of extraordinary government support in a crisis into its
ratings on systemically important U.K. banks … This is because we
believe that in practice the government cannot yet walk away from these
institutions without risking a failure of one bank spreading across the
system, disrupting the supply of credit to households and businesses”.

But the report – “Going, Going, Gone? Will The U.K. Government
Cease To Support Its Systemic Banks?” says that situation may change as
a result of the new legislation.

“We do not expect to remove the notches for government support for
systemically important U.K. banks within the two-year horizon of our
outlooks on long-term ratings, but we could do so in later years”.

–London bureau: +4420 7 862 7492; email: ukeditorial@marketnews.com

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