26 November 2013
Last updated at 07:42 ET
The Bank of England is to review whether it needs more powers to control banks’ balance sheets.
Bank governor Mark Carney said Chancellor George Osborne had asked the Bank’s Financial Policy Committee (FPC) to review its powers.
The FPC regulates banks, but not how much capital they must hold in relation to total assets – the leverage ratio.
He also queried the quality of official data and called claims about RBS’s treatment of small firms “shocking”.
On the leverage ratio, Mr Carney said he personally felt the FPC should have this power.
Being able to vary the leverage ratio helps to rein in risk-taking by banks.
The governor, formerly head of Canada’s central bank, told the Treasury Committee on Tuesday that regulators in his home country had similar powers, and this had helped them during the global financial crisis.
He said: “If I could pick one element that was essential to the performance of the Canadian banking system during the crisis, it was the presence of a leverage ratio.”
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I imagine you are asking yourself, at this juncture, why on earth this matters. Well, for a number of reasons”
In a letter to Mr Carney, disclosed by the Treasury Committee, Mr Osborne wrote: “Now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio, how it should use these powers and how any new powers would fit in with the rest of its macro-prudential tool-kit.”
Mr Carney told the committee that he expected the FPC’s review to take about a year, and hoped that new powers would be granted “quickly thereafter”.
International regulators are already finalising details of a leverage ratio, although these may not come into force for several years.
BBC business editor Robert Peston said: “The Bank of England hopes that the imposition of a leverage ratio will force banks to have a bigger buffer of loss-absorbing equity to protect them against the inevitable shocks that lie ahead.
“The absence of a binding leverage ratio in places like the UK meant that in the boom years banks grew at a highly dangerous rate by loading up on those categories of loans and investments – such as mortgages and assorted bonds – which were deemed low-risk by short-sighted regulators.”
On the economy, Mr Carney said that “all the elements” were in place for a pick-up in activity.
And he rejected criticism from committee member John Mann that he was too close to Mr Osborne and was using selective data to present a “rosier picture” of the economy. Mr Carney said he was “more than mildly offended” at the accusation.
However, on the quality of official data, Mr Carney questioned the reliability of some of the statistics being published.
He said he was more comfortable with official statistics in his native Canada and was wary of official measures of investment in the UK.
“We’re not putting full weight on that data, and it has to be said that it doesn’t entirely feel right that investment is, as measured, falling at a time when we see continued strengthening investment intention,” he said.
The Bank’s deputy governor, Charlie Bean, added: “I obviously have less direct experience of Canadian statistics than he [the governor] does. I would say that if you go back some years, the central statistical office, now the Office for National Statistics, actually used to have a reputation as being one of the best statistical agencies around the world.
“Now it may well be that if you could somehow compare different agencies, maybe it’s not quite such a strong performer. Some of that must reflect the fact that there has obviously been a squeeze on resources, it has had a lot of demands,” he said.
There was also shock at claims in two reports released on Monday about the Royal Bank of Scotland’s treatment of some of its small business customers.
Allegations that RBS deliberately forced viable firms to close “were deeply troubling and extremely serious”, Mr Carney said. “This has to be tracked down to the full extent of the law.”
Mr Carney also responded to criticism that his forward guidance on interest rates had created confusion. The Bank has said it will not consider an interest rate rise until UK unemployment falls below 7%, a rate that many economists now believe could happen sooner rather than later.
But the governor said that 7% is a “threshold, not a trigger”.
He said: “The exact timing of when that 7% threshold will be achieved is subject to uncertainty. We do our best to give our estimates of that uncertainty… One month’s unemployment figures does not have a material change on those likelihoods.”
“What the guidance is doing is giving businesses, households, financial market participants, parliamentarians perspective on the conditions that are necessary to exist in the economy before the MPC [Monetary Policy Committee] would consider adjusting monetary policy, tightening monetary policy – in shorthand, raising interest rates.”