For some values of “interesting”. Part the third.

October 9, 2012

Here’s what I actually sent in response to the Financial Policy Committe: Macro Prudential Tools consultation

1 Do you agree that the FPC should be responsible for setting the level of the CCB in the UK?
What are you asking here? Do you want to know whether we think there should be a Financial Policy Committee or a “Counter Cyclical Buffer” at all? Because if the existence of the authority and the mechanism are taken as read, then it’s obvious that the one ought to be in charge of the other. However as evidenced in the IA, you don’t seem to have considered (or at least to have shared in this document) any other option except creating the FPC or not. In short, the answer has to be “yes” because of the way you’ve framed the question, but the case for change is not made because you haven’t given any evidence of having considered any alternatives.

2 Do you have any views on the Government’s proposal to give the FPC control over the CCB buffer rate for the UK before 2016?
As for 1: it seems we’re taking part in a macro-prudential experiment whether we will or no.

3 Do you agree that sectoral capital requirements will be an effective macro-prudential tool for the FPC?
Were you a Latin scholar? I seem to remember that there is a Latin formulation for “a question expecting the answer, yes”. It sounds like a reasonable idea, but I would like to see a reasoned consideration of some alternative proposals before agreeing. It may be “effective”: will it be the most effective alternative we could reasonably adopt? I can’t tell from this.

4 Do you agree that the FPC should have the ability to apply granular requirements e.g. differentiated by LTV or LTI for residential property related assets?

As for 3. I would, however, like to point out that it appears that you are proposing a “fine tuning” mechanism which might well impose prohibitive costs or entirely prevent access to some forms of financing for particular kinds of customer with no consideration being given at the time of adjustment to any question of equality – for example it looks as if you could cut off the housing market entirely to dampen market “exuberance” without needing to consider the consequences for the people denied housing. I strongly suggest the FPC needs to be covered by the Equalities Act and to have a statutory requirement to give “due consideration” to equality issues as they might affect the end user of the banks’ or other financial institutions’ services before taking any action.

5 Do you have views on how macro-prudential sectoral capital requirements should be integrated with the existing micro-prudential framework?
None at all, sorry.

6 Do you agree that the FPC should have a direction-making power for a time-varying leverage ratio once international standards are in place?
Well again, it would be a pretty pointless institution if it didn’t, but what alternatives have you considered? Is there a need (for example) for the UK’s institutions to have a different mechanism from the EU’s or do you envisage the FPC acting as the UK arm of the ESRB? I also dislike the idea of giving the FPC carte blanche at this stage but would like to look at this again in 2018 or whenever the envisaged “international standards” are being put in place.

7 Do you believe that there is a case for the scope of the FPC’s directive tools to be applied to firms that are currently outside the purview of CRR/CRD IV?
No opinion, except again to point out the dearth of options offered.

8 Do you have any views on the best definition for exempting small investment firms from the FPC’s directive tools?
First use the SFIT definition (fewer than 20 employees) and then, because that doesn’t necessarily map to risk for a finance company, have a turnover and/or capital test. Around a million, probably.

9 Do you have any views on whether procedural requirements under FSMA 2000 should be modified or waived when the regulators implement FPC directions?
Either there’s a reason to have “procedural requirements” or there isn’t. If there’s a reason to have them, in that you’re trying to used evidence-based policy to make the best decisions, then that might be overriden in an immediate need, where someone (the FPC) has to make the decision urgently on evidence that might not necessarily be immediately available or shareable. But the procedural rules should still apply post hoc to justify the *retention* of the direction, or the direction should fall. In particular there should be no margin for equality issues to be overlooked or overruled.

10 Do you believe that liquidity requirements could be a useful tool for the FPC to have a direction power over once international standards have been developed?
As for 3

11 Do you believe that margining requirements could be a useful tool for the FPC to have a direction power over once international standards have been developed?
As for 3

12 What is your assessment of the advantages and disadvantages of granting the FPC a power to set and vary maximum LTV and/or LTI ratios?
No opinion, except to reiterate that there must be other options than do it/don’t do it. What are they?

13 Do you agree with the Government that recommendation powers will be sufficient to implement disclosure policies?
As for 3.

14 Do you have any comments regarding the Statutory Instrument?
Yes: I am surprised that you are asking for comments on the SI and not on the accompanying IA which is of poor quality (I see it has an amber rating). I have commented further on this in my blog entry.


Wendy Bradley

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