Commenting, John Charcol’s Boulger said: “In the Mansion House speeches at The Lord Mayor’s Banquet this evening neither George Osborne nor Mervyn King made any reference, contrary to rumours, to the Bank of England using its new micro prudential regulatory powers to impose a maximum LTV cap on mortgages. However, some of what The Governor of the Bank of England said about regulation was encouraging.
“George Osborne confirmed that the government would dismantle the tripartite regime and that the FSA will be abolished by 2012. He confirmed that the centrepiece of the new global standards for bank regulation will involve higher capital and liquidity requirements, with bank capital requirements responding to the economic cycle. He added that although this is what the G20 agreed last year the actual standards have still not been agreed.
“The Governor added that the Bank would set up “system-wide capital requirements (for banks) that vary over the economic cycle” and that “judgements on the level of these capital buffers will be part of the remit of the new Financial Policy Committee”. The intention is for capital standards to be tightened in the good times, allowing the banks to draw on the buffers thus created when times get tough, thus making the concept counter-cyclical. This all sounds very sensible in theory but in practice it will be very challenging to get the timing right.
“In a marked criticism of the flawed regulatory framework set up by Gordon Brown in 1997 Mervyn King said that “when the banks hit trouble the central bank needs to be fully involved in resolving those problems. The Bank of England cannot effectively perform its role as lender of the last resort without first-hand knowledge of the health of the banks to which it might provide support”.
“The Governor was able to say that “we shall aim to avoid an overly legalistic culture with its associated compliance-driven style of regulation” largely because consumer protection and market conduct regulation are now going to be separated from prudential regulation. After this year’s huge increase in FSA fees to pay for an equally huge increase in its staffing levels, despite a reduction in the number of companies it regulates, his comment that “we must reverse the seemingly inexorable trend towards more regulation and more regulators. That did not work in the past and is not the right response now” will be welcomed by those firms paying its fees.
“However, by saying “we should not put all our faith in regulation. It has limits…” perhaps Mr King was getting his excuses in early for the next regulatory failure!
“George Osborne confirmed that the government would establish a new Consumer Protection and Markets Authority to regulate the conduct of every authorised financial firm providing services to consumers. The regulatory fees it will charge the firms it regulates will effectively be passed on to consumers and so the Government should require it to undertake more robust cost benefit analysis than has often been the case with the FSA.
“Mervyn King’s comments on interest rates reinforced the view that Bank Rate will remain low for much longer than most economists are forecasting. He said that under prevailing market interest rates, although the odds were for inflation to remain above target over the next year, “looking two to three years ahead, the odds were on inflation being below the target”. The MPC always looks ahead for two years and so with a current expectation that inflation will be below target on that timescale it is hard to see much, if any, movement in Bank Rate for some considerable time, providing there are no external inflationary shocks to the system. This suggests that tracker mortgages will continue to offer good value for quite a while longer and that there is scope for fixed rate mortgages to fall further as the market reassesses its interest rate expectations.
“However, the comment from the Governor that when the time comes to tighten monetary policy it is most likely that this process will start with an increase in Bank Rate rather than a sale of some of the gilts bought under the Quantitative Easing programme was also noteworthy, as was the indication that these asset sales would take place over an extended period.”
