14 January 2013
The interim Financial Policy Committee (FPC) is today publishing a draft Policy Statement explaining the planned powers for the FPC to give directions setting extra capital requirements for the purposes of financial stability. The statutory FPC will be required to publish such a Policy Statement. A draft is being published today to assist Parliament’s scrutiny of forthcoming draft secondary legislation.
The government is planning two such powers: the countercyclical capital buffer (CCB) and sectoral capital requirements (SCRs). The CCB supplements headline capital requirements. The SCR supplements capital requirements on exposures to specific sectors judged to pose a risk to the system as a whole.
The draft Policy Statement relates to these powers of direction. It describes the circumstances in which the FPC might use the powers, taking account of their likely impact on the resilience of the financial sector and growth. It also describes some of the indicators the FPC will routinely review to help inform its decisions.
In addition to these powers of direction, the FPC will also have powers to make recommendations. Where the recommendation is to the Prudential Regulation Authority or the Financial Conduct Authority, the relevant regulator may be required by the FPC to comply or else explain publicly its reasons for not doing so. The draft Policy Statement is not about these wider powers.
The draft Policy Statement describes the circumstances when the FPC might increase capital requirements using these powers and the circumstances when it might then release these additional buffers of capital.
The FPC will draw on a wide range of analysis to inform its decisions. No single set of indicators can ever provide a perfect guide to systemic risks or the appropriate policy responses. The draft Policy Statement describes an initial set of core indicators that the Committee will routinely review. The FPC will regularly publish these indicators and draw on them in explaining its decisions. They will be supplemented by inputs from bank supervisors, securities regulators and market intelligence.