BoE Focuses on Restricting Bank Capital Held Against Mortgages and Derivatives

“The Bank of England’s Financial Policy Committee proposed powers to alter the amount of capital banks hold against real-estate assets as well as derivatives and bonds as it seeks to strengthen the financial system.

While the FPC will seek to act at the “highest level,” it also sees a potential need to target capital at a “more granular level,” it said a draft paper published in London today. “Such an approach might help to tackle threats to stability before they spread, particularly by leaning against exuberance in specific subsectors,” it said, noting high loan- to-value mortgages as an example.

The FPC has sought powers over so-called sectoral capital requirements — along with countercyclical capital buffers and leverage ratios — from the government as the Bank of Englandprepares to take over the role of ensuring financial stability. The committee, led by BOE Governor Mervyn King, is currently operating on an interim basis as legislation passes through Parliament.

The FPC said the use of the countercyclical capital buffer and the sectoral capital requirements “will improve the ability of the financial system to withstand shocks.” King is due to appear at a Parliament hearing in London tomorrow to answer lawmakers’ questions on the BOE’s semi-annual Financial Stability Report. FPC membersAndrew Haldane and Michael Cohrs will also attend the hearing….”

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