New Bank of England powers to keep lenders in check might include the ability to force banks to beef up capital cushions or curtail high-risk home loans, a Bank discussion paper said.
The Bank plans to tell the government in March what powers its new Financial Policy Committee needs to smooth out booms and busts in the banking sector under a major shake-up of British financial supervision after the financial crisis.
The paper lays out a menu of options for feedback from market participants and other regulators, drawing on examples from countries such as India, Canada, New Zealand and Hong Kong.
Almost all the tools listed have been discussed in recent FPC meetings or in speeches and interviews by Bank officials.
Among those that potentially could mark the biggest shift in Britain’s regulatory landscape are variable risk weights for different types of lending – something championed by Bank official Andrew Haldane.
Other options include caps on how much people can borrow to buy a home, curbs on banks’ bonuses and dividends, and liquidity and capital buffers that vary according to the economic cycle.
The FPC can already recommend banks to do any of these things, but under new laws coming into force at the start of 2013, it also wants the power to be able to compel recalcitrant financial institutions to behave as it wishes.
“Without the right instruments at its disposal, the committee will not be able to take prompt, effective action to tackle emerging risks,” Bank Governor Mervyn King said in a foreword to the paper.