They increase transparency around financial stability policy, and are instructive for what lies ahead. It will have been no surprise that the Committee regards the current economic and financial environment as presenting very real risks to stability, with the euro area’s problems foremost amongst them. The Committee decided to advise the FSA to find out more about the banking system’s exposures, to disclose more, and to get the banks themselves to disclose more. As part of that, FSA will be looking more closely at banks’ forbearance policies and practices. That is not just about internal systems and controls, important though they are. It is, centrally, about forming judgments on the adequacy of provisions. As such it is a step towards supervisors satisfying themselves about the broad robustness of bank’s asset valuations and risk weightings – a vital element of assessing capital adequacy. Crucially, beyond that, the Committee asked the regulators to ensure that, in the quarters ahead, banks should build their capital resources by retaining more than usual of their profits when profits are buoyant. Although the FPC does not yet have statutory powers, this was a sizable step away from the role played by the Bank over the past decade or so. It is not a sermon. It is a plan. To give it teeth, the Committee considered whether or not to set quantitative limits on distributions and/or qualitative guidance on what should be treated as “buoyant” profits.
Following practice in the USA, we encourage banks to pre-position collateral with us. It is only prudent to do so. Banks’ boards, as well as their supervisors, should take an interest in this as part of ensuring banks have sensible contingency funding plans. The Bank also holds a monthly auction of funds against a reasonably wide range of collateral. The size of those auctions could be increased to cope with stressed markets, and we are ready to do so where desirable. Access to our liquidity-insurance facilities remains confined to banks, as monetary institutions. But as I noted earlier, non-banks – including money funds and finance companies – turned to central banks for liquidity during the 2007–08 crisis. The prevalence of non-bank banks as they used to be called, or shadow banks as they are now known, was a deep faultline in the international financial system. Things cannot be left where they are. The status quo was deeply unsatisfactory, and if we do nothing it will be made worse by the re-regulation of the banking system, which creates powerful incentives to reinvent the economic substance of banking beyond the perimeter of prudential regulation and supervision. The authorities internationally, led by the FSB and with the active involvement of Adair Turner and myself, are debating how to tackle the phenomenon of “shadow banking”. A preliminary, but I hope substantive report will go to G20 Ministers and Governors in October.