Bank's macroprudential tools inquiry: terms of reference

All written evidence should be sent to treascom@parliament.uk.  The deadline for submissions is 22 June 2012.

Terms of reference

The Financial Services Bill proposes giving the FPC powers of direction over the Financial Conduct Authority and the Prudential Regulation Authority and the power to make recommendations to a wide range of parties.

Taken together, these powers of direction and recommendation constitute the FPC’s ‘macroprudential tools’.

The interim FPC of the Bank of England recently published its advice to the Treasury about the powers of direction it should have. These were:

• the countercyclical capital buffer;
• sectoral capital requirements;
• a leverage ratio.

Chair's Comments

The Government is handing the Bank of England unprecedented powers.

With these new tools the Bank will have a profound and even more direct impact on millions of individuals, households and businesses up and down the country.

The powers of direction provided to the FPC, when used, will affect the terms on which people can obtain mortgages and firms can obtain loans.

The interim FPC has said that having the power of direction over loan-to-value and loan-to-income restrictions could be beneficial for financial stability. The IMF agrees (see notes to editors below).

But the interim FPC did not ask for this power on the grounds that the ‘use of these tools would require a high level of public acceptability’. That reveals a lot.

The Bank’s reluctance to make such a request suggests that they themselves doubt their ability to explain the need for these tools to the public.

That is why it is important that we sort out the Bank of England’s accountability to Parliament and the public.

The Government’s proposals in the Financial Services Bill simply aren’t good enough. The Treasury Select Committee will continue to press for improvements.

And we will ensure that the public gets a full explanation from the Bank when they use any of their macroprudential tools. Hence this inquiry.

The Committee would welcome evidence on the following areas:

• whether the interim FPC has requested the most appropriate tools over which the FPC should be given the power of direction;
• whether additional tools should be given to the FPC (these may include tools rejected by the FPC, not considered by the FPC or that use the balance sheet of the Bank of England);
• the extent to which the FPC’s powers of recommendation are appropriate, and how they will work with the powers of direction;
• what structures should be created to provide the necessary transparency and accountability structures for the use of the tools;
• whether the FPC should provide guidance on the use of the tools, and if so, what form that guidance should take;
  whether the tools requested, taken as a whole, should be symmetrical, that is,  the extent to which they should ameliorate downturns as well as upswings in credit cycles, and
• what further analysis should be provided by the Bank of England before the macroprudential tools are granted to the FPC, and what analysis should be periodically produced by the Bank of England once any tools have been introduced.

Any further comments relevant to the choice, design, implementation and accountability framework of the macroprudential tools are also welcomed. 

Notes to editors

Point 16 of the IMF report published last week - United Kingdom—2012 Article IV Consultation Concluding Statement of the Mission - states: “A broader macroprudential toolkit is desirable. The interim FPC has appropriately requested powers to adjust the countercyclical capital buffer, sectoral capital requirements, and the leverage ratio. Additional powers should include the ability to limit loan-to-value and loan-to-income ratios, as higher capital requirements alone may be insufficient to restrain property bubbles. This will be especially true if most banks are comfortably above minimum capital requirements during the boom, such that higher risk weights on property loans may have little effect on banks’ lending behavior.”

Guidance on the submission of written evidence

Written evidence should be in Word or rich text format—NOT PDF format—and sent by e-mail to treascom@parliament.uk. The body of the e-mail must include a contact name, telephone number and postal address. The e-mail should also make clear who the submission is from. The deadline is Friday 22 June 2012. Submissions should be no longer than 3000 words. Submissions should be in the format of a self-contained memorandum. Paragraphs should be numbered for ease of reference, and the document must include an executive summary. View further guidance on the submission of evidence.

Submissions should be original work, not previously published or circulated elsewhere. Once submitted, your submission becomes the property of the Committee and no public use should be made of it unless you have first obtained permission from the Clerk of the Committee. Please bear in mind that Committees are not able to investigate individual cases.

The Committee normally, though not always, chooses to publish the written evidence it receives, either by printing the evidence, publishing it on the internet or by making it publicly available through the Parliamentary Archives. If there is any information you believe to be sensitive you should highlight it and explain what harm you believe would result from its disclosure; the Committee will take this into account in deciding whether to publish or further disclose the evidence.

For data protection purposes, it would be helpful if individuals wishing to submit written evidence send their contact details in a covering letter. You should be aware that there may be circumstances in which the House of Commons will be required to communicate information to third parties on request, in order to comply with its obligations under the Freedom of Information Act 2000.